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60% LDR target: Banks face difficult Options

As the September 30 deadline given to banks to meet the 60 percent loan-to-deposit ratio (LDR) by the Central Bank of Nigeria (CBN) approaches, lenders are grappling with difficult options that face them. Banks that currently do not meet the requirement are confronted with two choices: to increase their loan books or reduce deposits.

The CBN directed all deposit money banks to maintain a minimum LDR of 60 percent by September 30, 2019. The focus of the LDR minimum is to promote consumer and mortgage credit to drive demand, the apex bank explained.

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In the last three to four years, banks have not been bullish on increasing loans to the private sector. The overall availability of credit to the corporate sector decreased in Q2 2019 but is expected to increase in Q3 2019, according to Credit Conditions Survey Report published by the CBN.

“I don’t think the CBN regulation that will be met in a couple of months will change that stance,” Ada Ufomadu, senior banking analyst at Agusto & Co said, adding that most Tier 2 banks are complying with the new LDR minimum requirement, but not all Tier 1 banks do.

Meanwhile, the banks have laid their complaints with CBN and there are discussions with

the regulator on their concerns. It is certain that the loan book is not going to reduce much. Right now the industry’s LDR is about 66 percent. So the difference between 66 and 60 percent is not a significant growth to be expected. Even at that the banks will not increase their loans and the easiest approach they might take is to reduce their deposits.

“It means that banks may begin to reject high-cost funds and when there are many funds in the system that the banks are not willing to take up then it means the interest rates on these deposit may reduce that is why we think the interest expense of the banks will drop,” Ufomadu explained.

However, the banks are aggressively pushing credit to consumers in compliance with the directives of the CBN. Consumer credit rose from N747.88 billion in May 2019 to N753.85 billion in June 2019. This is a significant increase from the figure of N632.71 billion in December 2018.

Overall, personal loans accounted for 4.88 percent of total industry loans in June 2019. “While this is a positive development, current and proposed measures by the monetary authorities should help to boost this ratio significantly,” said Adeola Festus Adenikinju, member of the Monetary Policy Committee (MPC).

In his personal statement, Edward Lametek, deputy governor of the CBN, said, “I am hopeful that the differentiated cash reserves requirement (DCRR) and the recent policy specifying a minimum loan/deposit ratio would improve the flow of credit to the desired sectors of the economy”.

In banks’ to meet the requirement, the rating firm has foreseen price war in the banking sector where Tier I banks that are more advantaged in terms of low cost of funds could cherry-pick customers of Tier II banks, and negotiate for a lower interest from such clients.

“We do not foresee a significant increase in loan book due to a potential increase in credit risks,” Ufomadu said while unveiling the banking industry report in Lagos last week”.

The banking industry is still very much controlled by top five banks – Gtbank, Access, UBA, Zenith and First Bank. These banks account for about 57 percent of the industry’s asset and about 59 percent of the loan book.

According to the firm’s report, in 2018 the asset of the banking industry was about N33.3 trillion and growth in 2019 will be driven largely by the fact that a lot of banks are raising capital.

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