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LDR: A winning policy from the CBN?

Financial market operators await MPC decision today

Some policy thrusts of the Central Bank of Nigeria (CBN) have been criticised by this column in the past year, however the are signs we are about to see some real positives emerge from a new policy announced by the CBN a few months ago.

The CBN on July 03, 2019 released a new guideline for Deposit Money Banks (DMBs) via a circular on regulatory measures to improve lending to the real sector.

The highlights of the circular were that: with effect from September 2019, DMBs are mandated to maintain a minimum loan to deposit ratio (LDR) of 60 percent (compared to sector LDR of 58.5% as at May 2019 and regulatory maximum of 80.0%), subject to quarterly review.

Loan-to-Deposit ratio compares a bank’s total loans to its total deposits for the same period, and is generally expressed in percentage terms.

A higher loans to deposits ratio means that the bank is issuing out more of its deposits in loans and vice-versa.

In a bid to encourage lending to SMEs, retail, mortgage, and consumers, the CBN assigned a weight of 150 percent to these sectors in the computation of LDR. The CBN also disclosed plans to provide guidelines for the classification of businesses that fall under the named sector categories.

According to the apex bank, a failure to meet the minimum LDR of 60 percent by the specified date will result in a levy of additional Cash Reserve Requirement (CRR) equal to 50 percent of the lending shortfall of the target LDR.

The Cash Reserve Requirement or CRR refers to a certain percentage of total deposits that commercial banks are required to maintain in the form of cash reserve with the CBN.

In plain English the CBN was telling the banks to boost lending to the real sector of the economy or risk 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 like bonds and treasury bills.

Predictably there was some push back from analysts.

Global rating agency, Fitch said the new requirement was credit-negative for the sector.

According to Fitch the new directive will push some banks to significantly increase lending to riskier borrowers, potentially with looser underwriting or under-pricing of risk.

S&P Global Ratings for its part warned that the directive is unlikely to unlock credit, unless the government addresses other structural bottlenecks to investment in Africa’s most populous country.

It is understandable why the CBN is trying to change the behaviour of the banks and force them to undertake more of their core mandate of lending as they seem more comfortable investing in risk free government securities.

Net domestic credit (NDC) to the government surged by 64 percent between January and August this year, moving from N5.75 trillion to N9.456 trillion, central bank data show.

In the same period (Jan-Aug), credit to the private sector increased by just 8.29 percent, from N22.9 trillion to N24.8 trillion.

Since the CBN circular came out in July though, credit to the private sector has grown by 2 percent in the one month period to August (the most recent available data), while NDC to the government increased by a measured 3.42 percent.

This contrasts with the one month period between June and July when NDC to the government jumped by 20 percent, from N7.583 trillion to N9.143 trillion.

One month is certainly not enough to assess a trend, however the Governor of the CBN Godwin Emefiele came out recently to suggest that most of the country’s banks have obeyed the directive to raise their loan-to-deposit ratios to 60 percent and are creating more loans, with compliance levels being excellent, according to him.

Anecdotal evidence suggests this may be true.

Non-performing loans of the banks have fallen sharply since 2015, giving them more leeway to take on riskier lending.

The banks have thus rolled out aggressive technology/ mobile phone based solutions for customers intending to access loans and most of the loans requests are granted in seconds following a less than 1 minute credit check.

Guaranty Trust Bank, which is the country’s largest DMB by stock market capitalisation speaking in an investors’ conference call, following its second quarter 2019 results said the bank is on track to grow loans by about N40 billion – N50 billion to meet the CBN’s 60 percent LDR limit by the 30 September 2019 deadline.

Polaris, a Tier-2 Bank announced that it has launched a collateral-free salary advance Solution, where customers can access up to 50 percent of their net monthly salary capped at N500, 000 for a 30-day tenor or next salary date by dialling a number and the service is available 24/7 on all telecommunication networks.

The major positive from all this is that the 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.

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