Nigerian Deposit Money Banks (DMBs) gave out the most credit worth N33.84 trillion to the private sector in September 2021, driven by the loan policy of the Central Bank of Nigeria (CBN).
This represents an increase of 32.81 percent compared with N25.48 trillion in September 2019 after the introduction of the loan rule known as the Loan to Deposit Ratio (LDR).
In July 2019, the CBN introduced the policy requirement that targeted LDR at a minimum of 60 percent by the end of September 2019 and later increased it to 65 percent by the end of December 2019.
The banking sector regulator increased the LDR to spur growth to the real sector of the economy.
“The LDR was a major push for the growth in credit to the private sector as it came with some punitive measures should bank default,” said Abiodun Keripe, managing director, Afrinvest Research & Consulting.
From the high compliance level earlier witnessed, he said this had moderated as the elevated risks in the business environment weighed-in on banks.
“In terms of sector exposure, we are seeing a reshuffling of loan creation in line with the dynamics in the economy,” Keripe said.
Read Also: How CBN’s loan to deposit ratio policy spurred bank credit growth
In any case, oil and gas accounted for 25.4 percent in 2020, down from 26.6 percent in 2019. Increased credit was recorded in manufacturing, consumer credit, general commerce, information and communication and agriculture.
The credit growth was driven by LDR policy, the extension of regulatory forbearance and other macro-prudential measures, Kingsley Obiora, deputy governor, CBN, said.
Aliyu Ahmed, a member of the Monetary Policy Committee, noted that the increase in banks credit to the private sector was due largely to the increase in industry funding base as well as the CBN’s directive on LDR.
“Also, the declining lending rates, although marginally, provide some assurance of improvement in lending to the private sector in the near term,” he said in his personal statement at the past MPC meeting.
On a year-on-year basis, a report by FBNQuest notes total lending to the private sector increased by 13.8 percent to N33.84 trillion ($81.9bn) in September. It notes also that private-sector credit extension (PSCE) covers lending from all sources including the CBN and the state-owned development banks.
“This is a reasonable rate of y/y growth: however, we should note that the trend is gently downwards, and that Nigeria is underbanked. Among the DMBs, the larger institutions are guiding to loan book growth of around 10 percent this year, and the smaller operations closer to 15 percent,” analysts at the FBNQuest say.
It may be that some banks would rather pay the CBN’s penalties for falling short on the minimum loans-to-deposits ratio of 65 percent than disburse new credits that might in their view turn sour, notes FBNQuest.
Early this, the CBN deducted N1.2 trillion Cash Reserve Ratio from 24 banks. On December 2, 2020, the regulator introduced a special 90-day tenor bill with zero coupons as part of efforts to deepen the financial markets.
Subsequently, on December 11, 2020, the CBN conducted the first Special Bill, offering N4.1 trillion for 81-day tenor to banks from the excess CRR.
According to FBNQuest, one factor behind the increased loan books of the DMBs is currency weakness, which adds to the naira equivalent of the industry’s FX denominated loans, but we assume that the oil and gas segment is the principal beneficiary of these loans. Banks’ loans to the segment amounted to N5.29 trillion at end-March.
The expanding role of the development finance institutions, led by the recapitalised Bank of Industry (BoI), plays a part, the report states. The BoI concluded a $1bn syndicated loan in December 2020 and plans to raise another €750m from the sale of global bonds. Funds raised are on-lent to Nigerian firms out to 10 years at single-digit interest rates.
As at the end of September 2021, the CBN had released N800bn under the Anchor Borrowers Programme, N710bn under the commercial agriculture credit scheme and N340bn within the targeted credit facility and N1trn under the real sector facility. The MPC communiqué lists an additional eight smaller interventions. About 4.7m farmers/households/SMEs have benefited from the small-scale credits and more than 1,000 separate projects under the larger disbursements.
On the Non-Performing Loan ratio of banks, though it was above the regulatory benchmark of 5.0 percent, it has significantly improved from 6.42 percent in July 2020 to 5.38 percent in July 2021, reflecting the case-by-case review of regulatory forbearance, the impact of Global Standing Instruction policy, and strengthening of risk management practices in banks, Obiora said.
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