• Thursday, March 28, 2024
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BusinessDay

CBN’s LDR victory lap may be too soon

Banks borrowing from CBN window decline by 107.5%

Last week, this column offered cautious praise for the new Central Bank of Nigeria (CBN) regulatory measures to improve lending to the real sector, through a new minimum loan to deposit ratio (LDR) of 60 percent it had recently set.

The CBN had been rightly exasperated by the tendency of most deposit money banks (DMBs) to use excess deposits to fund the Federal Government through purchase of Government securities, rather than engage in their core mandate which is to create loans.

As a result of the new LDR directive there had been a noticeable increase in lending (in the past 3 months) and this column concluded that if banks are now thinking of how to be innovative to provide core banking services to their customers, It is an outcome (which if sustained in the medium to long term by the banks) that the CBN should take a whole lot of credit for.

However in an unexpected move last week Monday, the CBN in all intents and purposes, took a victory lap, over its new policy, when it further increased the minimum LDR to 65 percent, with immediate effect, which banks must attain by December 2019, or pay a penalty of additional Cash Reserve Requirement (CRR) equal to 50 percent of the lending shortfall implied by the target LDR.

This implies any bank that fails to maintain the new specified LDR risks being required to park more of their excess funds with the CBN where it would not earn much in interest and could not be used to purchase Federal Government securities such as bonds and treasury bills.

“To encourage the SMEs, Retail, Mortgage and Consumer Lending, these sectors shall be assigned a weight of 150% in computing the LDR for this purpose,” the CBN said in the new circular.

Loan-to-Deposit ratio (LDR) compares a bank’s total loans to its total deposits for the same period. A higher LDR means the bank is issuing out more of its deposits in loans and vice versa.

The CBN noted that gross credit of the banking sector rose from N15.56 trillion as at end-May 2019 to N16.39 trillion as at September 26, 2019, translating to N829.40 billion or 5.33 percent increase within the period.

The column last week had talked of a medium to long term period (18 months – 36 months) for which this experiment with a minimum level for LDR (then at 60%), would unfold and if successful, the CBN could then take credit and/or adjust the policy.

Investors and policy watcher were however blindsided by the new pronouncement, which implies that the CBN is gauging the impact of its new LDR policy on just a 3 month time period, which is clearly inadequate given all the variables at play in a somewhat complex economy like Nigeria’s.

For starters the global macro-economic backdrop suggests a weakening of major growth indicators across different large economies.

In the U.S. the once tight labour market is seen as gradually losing steam as a weak reading of activity in the services industry and a similar downbeat report for manufacturing, along with purchasing managers’ disappointing assessments of employment, jolted investors.

Data from Europe’s largest economy suggests economic woes are becoming more pronounced, with a sharp slowdown in services and manufacturing.

China the world’s second largest economy continued on a slower trajectory in September, with weakness in manufacturing and retailing combining with the trade war to undercut growth.

South Korea, a bellwether for global growth saw exports slide 11.7 percent in September, meanwhile oil prices have quietly dropped below $60 a barrel (around where they were before the terrorist attacks on Saudi Arabian oil facilities) , as a weakening global economy and fears of recession erode oil demand.

Central banks around the world are loosening monetary policy to offset the global slowdown made worse by U.S.-China trade tensions. Australia cut rates last week for the third time this year, while the Philippines and Indonesia eased policy rates last month.

The CBN for its part is trapped in the unenviable position of being unable to loosen policy to stimulate growth due to concerns over potential naira weakness.

It is clear that against these backdrops it is no time for banks to begin to take on greater risks by aggressively expanding their loan books, especially in a bid to satisfy a regulatory directive. The last time oil prices collapsed in 2014, Nigerian banks saw a surge in non-performing loans, which they are just beginning to get out of.

Investors seem to agree. A gauge of the largest most liquid banks listed on the stock market has returned -18.44 percent year to date.

The CBN should perhaps be paying more attention to the signals the markets are sending.