Banks Are Cutting Credit Lines, Should You Be Scared?

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It appears that banks have already started revising their credit policies in view of the bleak economic outlook of the country this year. The Punch reports that Deposit Money Banks have started reducing their lending to companies in some sectors of the Nigerian economy. This revised credit policy might see banks reducing credit facilities for come companies by as much as 50% because of concerns over the ability of those companies to pay back borrowed funds.

Why Are Banks Cutting Credits Lines?

In a recent piece, I talked about how the government might be running the 2015 budget at a deficit unless it reduces it expenses. It seems the government is opting to reduce expenses rather than incur more debts; hence, many companies that depend on government patronage might be in for a low volume of government business in 2015.

The main reason banks are cutting credit lines is that the income of such companies are likely to be impacted by the looming cut in government spending. When government reduces its spending, the income/revenue of these companies that are heavily reliant on government patronage will be reduced and they might not be financially buoyant enough to service their debts.

Interestingly, banks tend to be great managers of risk and they are already taking proactive steps to ensure that they don’t lend money to companies that might find it difficult to pay back.

Which Companies Are Most At Risk?

The most important question that you will want to ask is that which companies are at risk of losing a significant part of government patronage and shrinking credit facilities from banks. The companies that are at the greatest risk are airlines, travel agencies, construction companies and procurement and supply agencies.

For one, the government is unlikely to shell out money for all but the most essential travel for its many ministries and parastatals. Hence, travel agencies that make these travel plans and the airlines that are booked to the brim with aides and assistants might discover that they have a low level of government patronage this year.

Construction companies that handle mostly government contracts are at risk because many projects might be scaled down or canceled as the government tries to prioritize its expenses. In addition, construction companies might be in for lower profit margins as the cost of construction materials continue to rise because of the fall in the value of the Naira.

How Will the Average Nigerian Be Affected?

It needs no mentioning that people who work in the aviation, construction and purchasing and supply industries might expect some downsizing or cuts in paychecks as these companies also try to cut costs in order to maximize shareholder value. It might be high time you opened an emergency savings account if you work in any of the aforementioned industries and you know that your company is mostly reliant on government patronage.

Image Credit: http://www.tamilula.com/
 
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