High interest rate: N2.5trn loan strangulates consumer goods manufacturers

•Pay N600 bn interest on loans as rates rise 108% •Losses rise by 839.1% to N406.8bn •Why loan is unsustainable – Analysts

The  high interest rate charged by banks and other lending institutions coupled with other cost of operations have become a major challenge impeding the growth of the  manufacturing industry.

The  major consumer goods manufacturing firms  have resorted to bank credits to run their operations amidst cash flow challenges

The companies’ combined borrowings rose to 2.5 trillion in the first half of the year, H1’24, amidst high borrowing cost induced by inflationary pressure among other economic headwinds.

The amount indicates about 77.8% rise in borrowing higher than the N1.7 trillion they borrowed in the corresponding period of 2023, HI’23.

Also the huge borrowings were executed on much higher interest rates during the period.

Consequently, the manufacturers’ profitability have been eroded recording a combined loss before tax of N406.7billion in H1’24, representing a huge 839.1% rise in losses as against the N43.314 billion loss they recorded in H1’23.

Financial Vanguard’s analysis reveals that though about five of the 11 fims made a total profit of about N158.802 billion, the other ones recorded a combined loss of about N565.553 billion.

But the combined firms’ turnover increased by 66.8% to N2.5trillion in H1’24, against N1.5trillion they recorded in H1’23, indicating that the increases in the prices of their products were not enough to cover their costs and probably consumer resistance may have restricted them from further increases.

Meanwhile, the companies have explained that the manufacturers continue to navigate the challenging operating environment characterised by soaring inflation, exchange rate volatility, security challenges, elevated input costs, and weakening purchasing power.

Financial analysts have noted that the sustained increases in the Monetary Policy Rate, MPR, by the Central Bank of Nigeria, CBN was adding to the financing cost burden on the manufacturers.

This year alone the CBN has raised MPR three consecutive times amounting to 800 basis point to 26.75% from 18.75% last year, triggering sharp rises in banks’ lending rates, and the borrowers are made to cough out more money to service their loans.

Borrowing cost

For the leading consumer goods manufacturing companies interests they paid on their loans rose sharply by 108.2%  to N600.5billion in H1’24 from N288.4billion in H1’23.

The affected companies monitored by Financial Vanguard are, Nestle Nigeria Plc, Unilever Nigeria Plc, Cadbury Nigeria Plc, Nigerian Breweries, NB Plc, Dangote Sugar Refinery Plc, NASCON Allied Industries Plc, BUA Foods, Champion Breweries Plc.

Others include: Guinness Nigeria Plc, International Breweries, and MCNICHOLS Consolidated.

Analysts react

Commenting on the borrowings by manufacturing companies, an investment expert and CEO, Wyoming Capital and Partners, Tajudeen Olayinka, said: “Companies can borrow to improve production capacity and reduce average cost. Where this is the case, such borrowing is considered positive, and could improve fortunes of shareholders of the company. Where such borrowing does not improve production efficiency, it can become negative to the value of the company and make shareholders worse off. This is what most companies try to consider before borrowing from short-term money market or long-term capital market.”

On the benefits of borrowing by manufacturing companies, he said: “Borrowing that improves operational efficiency would naturally benefit customers and other stakeholders. Borrowing must be done to improve shareholders wealth; and customers must have been given thoughtful consideration before embarking on such borrowing.”

However, he lamented that, “Short-term borrowing from banks could be more expensive at this time, especially if we consider the effect of rising inflation and interest rate hike by Monetary Policy Committee of CBN, which has compelled many banks to reprice loans and other financial instruments, leading to higher borrowing costs for firms and public companies. Borrowing from banks could be more problematic at this time”.

Continuing, he stated: “Regardless of cost implications to public companies, short-term borrowings from banks might have been provided as bridging facilities for more flexible long-term capital already arranged by those companies, or as a way of obtaining working capital. It could also be a sign of weakness in annexing suppliers credit by some of those companies.”

On whether the government can aid manufacturers, Olayinka said: “That could be another way of asking government to provide financial subsidy, when they are already enmeshed in fiscal crisis. I think the best way is to allow market to function, so that assets are properly priced in the long-term interest of the economy.”

In his own view, analyst and Vice Executive Chairman, HighCap Securities Limited, David Adonri, said: “It is common for manufacturing companies to borrow for working capital finance. “Rising cost of raw materials and expenses, in an inflationary environment, underscores the necessity for additional working capital which internal funding cannot provide.

“Increasing demand for manufactured goods due to consumer pull is another factor that may propel the need for additional working capital finance.

“Well established manufacturers can also source working capital or short term funds from the investing public by issuing commercial papers (CPs). More manufacturers are adopting this mode of finance to escape the stringent conditions attached to bank credits. Additionally, CPs provide higher volume of funds at much lower interest rates.

“The increase in short term borrowing by manufacturers when compared to last year can be attributed to increase in economic activities post Covid19 and rising cost of manufacturing inputs and distribution expenses.

“Debt finance is a last option for an enterprise. It comes with a lot of risks that can cripple an enterprise if repayment becomes difficult. The danger of debt finance is accentuated by rising interest rate and weakening demand environment now prevalent in the Nigerian economy.

“The rising interest expenses which surpass the increase in borrowing is capable of seriously eroding the profit of manufacturers and may hence depress distribution to shareholders. It is a warning signal that investors may not enjoy higher dividends this year. The implication of rising interest expenses is increase in price of goods. This erodes the purchasing power of consumers.

“It is practically impossible for a manufacturing company to be self sufficient in working capital finance. Hence, they secure supplier and bank credits from time to time to overcome their short term capital deficit. However, bank credit comes with a cost that can be dangerous if things go wrong. While bank credit supplies the much needed short term life line, its low retention in the business because both principal and interest must be repaid at intervals, can increase the financial pressure on operations. Any business disruption can cause default in repayment and possible foreclosure by the bank.

“Therefore, the increasing use of bank credit by manufacturers can become harmful to both debtor and creditor if macroeconomic conditions continue to deteriorate in Nigeria.”

On government intervention, Adonri, said: “The administrative intervention of government in the credit market through CBN has not been very effective. It continues to distort the market mechanism that ought to efficiently allocate credit in the economy. The interventions have also not been appropriately directed to the foundational sectors of the economy.

“Fiscal intervention can be by way of subsidy to manufacturers to enhance production while monetary policy should target low interest rate environment. If manufacturing inputs can be internalized through appropriate fiscal measures, then manufacturing cost can reduce to the point where finance cost will become negligible.”