Banks pull credit lines from hard hit private schools
... as Covid-19 lockdown dries up cash-flows …Proprietors may rethink relationship with lenders
Dayo Ogundipe (not real name) is a private school owner. Before Covid- 19 pandemic, his office as an administrator/proprietor of a renowned private school in Lagos was an attraction point for many bankers who jostled for audience to manage the school’s various accounts.
Before now, private schools’ bank accounts were lucrative and worth hunting for because of the students school fees worth millions of naira paid every academic term (three times within a year) through the bank accounts.
Not until the Covid-19 pandemic made governments shut schools did Ogundipe realised that not all the financial institutions would be there for him in times of need.
“Students went on vacation as schools were shut. My teachers managed to go home with just a month pay. Barely one month into the Covid-19 lockdown, I approached my bank for a short-term facility to aid payment of my teachers’ salaries at least to cushion the effect of the lockdown. I was surprised my request for the facility was not granted as my bank insisted that uncertainty over schools resumption remains a big risk,” Ogundipe said.
Reacting to Businessday questions on this information, a banker who prefers anonymity, said, “Banks lend against cash-flow and the decision to approve or disapprove a loan request is based on expectations and comfort about the viability of the future cashflows, against which banks lend. Without sentiment, no bank will want to lend against an uncertain cash-flow.”
He further stated, “While there is always an element of risk in the realisation of future cash-flows, against which a bank lends, a situation where there in absolute uncertainty on the future cash-flows of schools puts banks in difficult situation to approve loans, without clarity on resumption date.”
Incidentally, the cash-flows of schools may also be relatively weak on resumption, given the current slowdown in the economy and waning income levels, which may affect the ability of some parents to pay their wards’ fees as at when due.
“Hence, banks may have taken this hard decision to wind down exposure to schools to mitigate the already rising Non Performing Loans (NPLS) from the education and a number of other sectors, as the economy gradually emerge from the unprecedented challenges of the Covid-19 pandemic,” our banking source said further.
The haste in which banks declined the request for overdrafts to school owners at this period of Covid-19 was very disheartening, Onyeka Jalobo-ojigbo, owner of Nemvas Schools, Lagos, said.
According to Jalobo-ojigbo, even though the banks may be acting in their own interest, “the decision to deny her and other school owners at their point of needs is really not good for business going forward.
“If my bankers cannot support me at the slightest business challenge, there is no point staying with them once things become normal again.”
Even though banks are in business to make money, “their decision to assist should be merit-based; they should look at the inflow and outflow of the schools,” she noted.