Even With the CBN’s directive to commercial banks to give more loans to customers, what happens to demand for collateral by banks?
Though the Central Bank of Nigeria has mandated banks to lend up to 65% of their total deposits at any given time, the customers must still provide collateral. Yes! You must bring acceptable collateral otherwise no deal. You may wonder why.
Do you know that loans banks give are part of the deposits their customers leave with them? In essence, banks have no money of their own to lend; they rather lend a percentage of the deposits left in their care by non-borrowing customers. That is why the Central Bank of Nigeria (CBN) and National Deposit Insurance Corporation (NDIC) regulate how banks lend money in Nigeria. They also punish bank owners and managers for lending carelessly by sacking the management team and taking over the banks.
Please note that it is illegal for a banker to advance a loan above N50,000 to a customer without collateral. In fact, all the credit policies of Nigerian banks prohibit lending a kobo to a bank customer without collateral. All banks have even made it impossible for any of its officers to grant loan to a customer by crediting the customer’s accounts without approval. The banks’ computer software enabling loan disbursement now are controlled from the headquarters or regional offices.
Even though some bankers find a way to allow customers overdraw their accounts without collateral, that does not make it normal. Many branch managers pushed by the pressure to make profit, circumvent this law by giving unauthorized overdrafts especially in the market branches.
Because this mode of lending is too risky, the borrower is charged very high interest rates. Remember, the higher the risk, the higher the returns to the lender.
If the customer fails to repay the unauthorized overdraft and the law is applied, the banker will be jailed because the loan was given without collateral.
Therefore, smart bank customers intent on increasing their capital through bank loan begin early to position their businesses by acquiring suitable assets they can pledge as collateral for bank loans assuming that they have met all other loan criteria.
Borrowing from a bank is not an impromptu act like going to the convenience. Smart customers plan for it.
Most banks in Nigeria feel very comfortable with landed property as a collateral. So acquire one.
Note that land alone is not very acceptable until there is a building, with an approved plan, on it. An undeveloped land is not usually acceptable to bankers because it could be repossessed by the government. It has happened several times.
The property that will most certainly appeal to a lender must pass the following tests:
1. The property that can be easily sold off is the best suited for loan security. The whole idea is for the banker to sell off your property so easily if you are unable to repay your loan. The location of the property is very key. Those situated at city centres are most appealing.
2. A property without a legal title (e.g. C of O or Deed of Assignment or Conveyance with governor’s consent) is no title. You should ensure that you obtain the relevant title on your land to enable you unlock the treasure it holds.
3. The property must has an approved building plan even though the land has a C of O. Governments had in the past, demolished unapproved buildings hence reducing the value of the property. You can get an approved plan even if you have already developed the land by paying penalties. Visit the ministry of lands to make an enquiry.
4. Do not bury the dead in the compound. A visible grave or tombstone inside the compound of a beautiful property has reduced the commercial value of that property. What if the grave houses a notorious native doctor? Bury your dead in another place. That’s why the western world invented cemetery.
5. The banker is not interested in the property in your village or town if the place is not a city. He won’t accept a palace or property housing a shrine. He can’t easily sell those ones.
Small borrowers can also borrow against their fixed deposits and treasury bills.
In a stable economy, shares of blue chip companies can be used to secure a loan.
Please note that a bank can only lend you a maximum of 75% of the amount realizable when your property is sold in a hurry. The possible price at which an uninterested person would buy your property because of lowered price is called forced sale value. This is usually about 25-30% discount on the market value of your property.
Now you know this, it is a smart thing to do if you use a portion of your profit to buy land in a city and build a house (even if it is a boys’ quarter) on it. Then, ask an estate valuer to give you the market value and the forced sale value of the property. That will give you and idea of how much loan you can get from the bank.
Don’t lead your banker into temptation of lending to you without collateral.
Stop inducing, tempting or seducing your bankers to break the law.
It is like doing something without protection.
Do not do it to your dear banker.
Bank loans are for the smart to take and repay. Big businesses need bank facilities to flourish.
“I don’t need bank loan”, is only for a small, medium and conservatively large businesses yet to face crushing needs for funds.
The above is the secret of many successful business persons.
Now you know it, do something today!
Anayo Nwosu is an investment banker at top management cadre, in a new generation Nigerian bank.
Disclaimer: The views and opinions expressed by writers and shared on our blog, does not necessarily reflect that of Kaluza. We don’t necessarily agree with the views/opinion shared on our blog.