The Central Bank of Nigeria (CBN), in its bid to improve lending to the real sector of the Nigerian economy, has for the second time this year upwardly reviewed deposit money banks’ portion of minimum loanable deposits to 65 percent with immediate effect.
The decision, which is subject to quarterly review, was informed by appreciable growth in the level of the banking sector’s gross credit following the pronouncement of a 60 percent minimum Loan-to-Deposit Ratio (LDR) in July 2019 and the need to sustain the momentum, the apex bank said in a September 30 circular seen by BusinessDay.
“All Deposit Money Banks are required to attain a minimum of LDR of 65 percent by December 31, 2019,” the CBN said. “To encourage the SMEs, retail, mortgage and consumer lending, these sectors shall be assigned a weight of 150 percent in computing the LDR for this purpose.”
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.
“In order to sustain the momentum and in line with the provision of our earlier letter, the minimum LDR target for all Deposit Money Banks (DMBs) is hereby reviewed upwards from 60 percent to 65 percent,” the circular noted.
Jerry Nnebue, banking analyst at CardinalStone, noted that most banks are in a comfortable position to meet this demand with the exception of maybe one or two that still need to do more.
Nnebue said the big question is the strength of the banks’ risk management framework to be able to deal with the sectors they are expected to lend to.
“Banks have learnt their lessons from the period of high assets quality issue. Most of the banks have strengthened their risk management framework; this would help them be in a better position to streamline lending to these sectors,” Nnebue said.
He further noted that the new LDR target would not impact negatively on the shares of the banks, adding that banks are not new to this new lending directive by the CBN.
The new policy geared towards driving risk asset creation could potentially result in NGN860.49 billion in loans created at the top end of the range, given the new 150.0 percent weightings for exposures to the SMEs, retail, mortgages and consumer credit, Cordros Securities said in a report.
“While banks could potentially shed deposits to reduce this figure, we don’t see this as a strategy that will be pursued, rather we expect banks to re-categorise loans that fit into the retail and consumer credit segments as well as grow loans to these segments, thereby significantly reducing the amount of credit that would need to be created,” the report said.
The financial regulator is determined to ramp up growth in Africa’s largest economy on the back of continued sluggish expansion in Nigeria’s aggregate economic activities since its emergence from a recession in the second quarter of 2017. The economy grew 1.94 percent in the second quarter of this year from a revised 2.10 percent in the previous quarter, casting a shadow on the International Monetary Fund’s annual growth forecast of 2.3 percent for the country.
According to the circular, failure to meet the minimum LDR before the end of 2019 would result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall implied by the target LDR.
This implies any bank that fails to maintain the specified LDR would 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 such as bonds and treasury bills.
In recent times, the trend of non-performing loans (NPL) has been positive, as banking industry NPLs declined from 14.8 percent in full year 2018 to 9.6 percent as of June 2019. The CBN directed the lenders to continue to strengthen their risk management practices particularly with regard to their lending operations.
Abimbola Omotola, analyst at Chapel Hill Denham, noted that banks need to be careful on the potential impact this could have on their asset quality, recalling that the last financial crisis in the banking sector happened not too long ago.
“The memory is still fresh and the weak macro backdrop is a major concern,” Omotola said.
The apex bank further noted that it would continue to review developments in the market with a view to facilitating greater investment in the real sector of the Nigerian economy whilst promoting a safe, sound and resilient financial system.
OLUWASEGUN OLAKOYENIKAN & OLUFIKAYO OWOEYE
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