For the second time in six months, the Central Bank of Nigeria (CBN) has sanctioned banks for failing to meet its new loan to deposit ratio (LDR) directive.
The CBN debited deposit money banks about N600 billion for non-compliance with the 65 percent LDR.
The apex bank had given banks up to December 31, 2019 to comply with the 65 percent LDR or face sanctions.
Although the details of the deductions are not yet open, sources told BusinessDay that it was done last week Monday, using daily return numbers of banks. The sources say they expect that CBN would make the announcement within the coming week.
Tunde Abidoye, head, equity research at FBNQuest, confirmed that the banks were indeed debited.
“I can confirm that the banks were indeed debited. I don’t have the industry numbers yet,” Abidoye said.
“The major implication is that there will be more competition to create quality risk asset by the banks. This may continue to put pressure on interest rates and banks’ net interest margin,” he said.
Ayodele Akinwunmi, relationship manager, corporate banking, FSDH Merchant Bank Limited, said he was not aware of the debit.
Efforts to reach a CBN top official for comment were not successful. A CBN deputy governor did not respond to a text message sent to his phone. Similarly, a Monetary Policy Committe member did not respond to calls to his telephone.
The loan to deposit ratio was raised twice in 2019. First, it was raised from the previous 58.5 percent to 60 percent in July with a deadline of September 30, and then to 65 percent in October with a deadline of December 31.
The N600 billion fine is following a fine of around N499.1 billion placed by CBN on banks for defaulting on the 60 percent LDR directive as at September 30, 2019. This brings the total sanction by CBN on banks to almost 1.1 trillion in the second half of 2019 alone.
CBN sanctions are punitive measures taken on the banks for failure to adhere to the regulator’s instructions. CBN in a letter to all banks stated that failure to adhere to the minimum loan to deposit ratio of 65 percent by the specified date would result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall of the target LDR.
The sanction of N600 billion means that banks had a loan shortfall of around N1.2 trillion from the required value of loans that will have enabled them meet the 65 percent LDR policy. While the banks will not lose the money taken as sanctions, they will forfeit any interest they would have earned on the deposits. Analysts told BusinessDay that banks may be losing up to N6 billion monthly in interest income due to this December sanction.
Up to 12 banks defaulted in meeting the 60 percent deadline at end of September, warranting the CBN to sanction the banks with fines totalling N499.1 billion after a combined loan shortfall of nearly N1 trillion.
However, the regulator refunded part of the funds it debited a dozen lenders that missed its September deadline of a minimum lending threshold after a majority of the affected banks improved their LDR positions.
Analysts say they expect to see increased growth in loan exposure from the big banks in the fourth quarter of 2019 as many of the banks significantly reduced their prime lending rate which helped make loans cheaper and more affordable for businesses. However, not everyone is optimistic that the banks created enough loans to avoid another round of fresh sanctions from the apex regulators.
“It will be very difficult for most banks that defaulted the first time to suddenly meet up with a higher hurdle,” said one banker in one of the Tier-2 banks who pleaded anonymity.
“I expect the combined fines to be somewhere between N200 billion and N300 billion this time, which is smaller than we saw the last time, but things can get even worse for banks if CBN increase the loan to deposit ratio again. I am not sure the books of the banks will still look healthy in 2020 with all these rush to book loans,” the person said.
The CBN may be considering raising the LDR once again this year, Hassan Bello, CBN’s director of banking supervision department, said while speaking at the 2019 workshop for finance correspondents and business editors.
“We are thinking of doing 70 percent by the end of next year. Within the period that we have increased the LDR, industry lending has increased by over N1.1tn,” Bello said.
CBN has been encouraged by the performance of loan creation since it began raising LDR. The apex regulator appears confident that by raising the bar higher and higher, banks would be forced to do what they are reluctant to do, which is to create more loans in a low growth environment with high risk-free treasury bill returns.
HOPE MOSES-ASHIKE & IFEANYI JOHN
