The Central Bank of Nigeria (CBN) will from September 30, 2019 begin a month by month monitoring of loan to deposit ratio (LDR) threshold of Deposit Money Banks (DMBs), Godwin Emefiele, governor of the apex bank, said while announcing a hold on the benchmark interest rate after the two-day Monetary Policy Committee (MPC) meeting in Abuja.
The CBN had given the banks a September 30 deadline for the commencement of a minimum of 60 percent loan to deposit ratio, which was targeted at increasing credit to the real sector of the economy.
According to the CBN, a failure to meet the minimum LDR of 60 percent by the specified date will result in a levy of additional Cash Reserve Requirement (a specified minimum fraction of the total deposits of customers which commercial banks have to hold as reserves with the central bank) equal to 50 percent of the lending shortfall of the target LDR.
The LDR is a ratio between a bank’s total loans and total deposits, and is generally expressed in percentage terms. A high loan to deposits ratio means that the bank is issuing out more of its deposits in loans and vice-versa.
The 11 MPC members present also voted to retain the monetary policy rate (MPR) at 13.5 percent, Cash Reserve Ratio (CRR) at 22.5 percent, Liquidity Ratio at 30 percent as well as the Asymmetric Corridor around the MPR at +200/-500 basis points.
“The decision was informed by the conviction of all members that key macroeconomic indicators were trending in the right direction and because of the lag effect of policy actions on output,” Emefiele said.
The committee observed that CBN had begun the prescription of using benchmark loan to deposit ratio to redirect banks to focus on lending.
To mitigate the credit risk, the committee enjoined the management of the bank to de-risk the financial market via the creation of viable credit scoring system similar to what applies in the developed countries as this would encourage DMBs to safely grow their credit portfolio.
“We need support to achieve growth in Nigeria and it is important that when the MPC raised a concern about the flat loan to deposit ratio, it was just about 57 percent which is too low whereas in other climes, loan to deposit ratio is more than 100 percent,” Emefiele said.
For instance, he said loan to deposit ratio in Brazil is 70 percent, China 71.2 percent, India 75 percent, United States 75 percent, South Africa 91 percent, Kenya 76 percent, and Japan over 70 percent.
“We need banks to play their role of financial intermediation, therefore we will continue to prescribe the ratios to give directions on the policy,” he said.
The MPC called on the fiscal authorities to take action on expanding the tax base of the economy to improve government revenue and stem the growth of public borrowing. It further urged the fiscal authorities to put fiscal buffers in place to avert macroeconomic downturn in the event of a decline in oil prices.
Ayodele Akinwunmi, head, research, FSDH Merchant Bank Limited, said it is clear that the CBN will continue to implement measures that will lower the interest rate on private sector lending and reduce the yield on the fixed income securities.
He said the CBN wants to ensure that its directive to increase lending to the private sector is carried out. This is in fulfilment of its goal of accelerating economic growth to create jobs and integrate key sectors of the economy.
“Now that the ministers list has been sent to the National Assembly, it is expected that the fiscal authority will provide the necessary incentives that will complement the policy of the CBN so that increased banks loans don’t lead to an increase in non-performing loan in the country,” Akinwunmi said.
The committee also called on the bank to intensify effort to encourage Nigerians in the Diaspora to use the official sources for home remittances, noting the effort to curb delay or considerations geared towards improving the current account balance of the nation. It enjoined the banks to use incentives such as the reduction of charges in Diaspora home remittances into Nigeria.
Also concerning the possibility of creating subprime loans, Bismarck Rewane, managing director/CEO, Financial Derivatives Company Limited, said there is a trade-off to the economy.
“Banking institutions are financial intermediaries as opposed to taking surplus funds to where there is deficit within the context of risk architecture,” he said.
Meanwhile, Emefiele refuted insinuations that the apex bank was considering banning banks from participating in the weekly Open Market Operations (OMO)/Treasury Bill Auctions.
“If banks cannot play their roles as financial intermediators, there is real problem,” Emefiele said.
“To show that we are serious, last week, we did an auction, one to signal that we are still on a tightening mode, but insisted that we do not want proprietary auctions by the banks but rather auction demand from their customers. We don’t want them to invest their money in treasury bills,” he said.
He, however, added that “from time to time, the CBN will provide special auctions to really direct the focus of actors in the money market”.
“So the story that maybe there are plans to bar banks from investing in treasury bills and OMO is wrong, but we need everybody’s support in this direction to boost lending to private sector and economic growth,” he said.
Emefiele also confirmed reports that the CBN was planning to restrict FX access for the milk imports, making it the 44th item to be added to this list.
He said the decision came through considering that the country has the capacity to produce the quantity of milk consumed as well as the huge FX spent on the import.
Milk import, he said, gulps as much as $1.2bn to $1.5bn annually and according to him, this can no longer be condoned.
He said they held several meetings with WAMCO, one of the largest importers of milk into the country, on the need to now begin to backward integrate and begin the process of producing milk locally, regretting that three years later, nothing has happened in this regard.
Emefiele said by producing the milk locally, the companies which rather prefer to import could help Nigeria tackle the bourgeoning herder-farmer crisis.
He warned that people should learn to respect the policies of the country and assured on the CBN’s support to the milk subsector.
“We are determined to make milk production in Nigeria a viable economic proposition and we would need to be supported. If you need a loan to acquire land for artificial insemination of your cows, any kind of sustainable loan in this venture, we will give you, but that you will continue to import milk into the country, I think we are getting to the end of the road,” he said.
“The era of restriction of milk for foreign exchange is coming quite soon,” he warned, noting, “If the milk companies won’t change their policy in milk import, we will not change our policy on FX restriction; that is our position.”
Reacting to the CBN’s plan to cut off milk importers from accessing foreign exchange, Muda Yusuf, director general, Lagos Chamber of Commerce and Industry (LCCI), lamented the lack of policy incentives to encourage backward integration which would end up making the apex bank’s move counterproductive.
“It is good to backward integrate but we need to have policies in place to develop each aspect of the economy,” Yusuf said.
Hope Moses-Ashike, Segun Adams, Gbemi Faminu, Lagos, & Onyinye Nwachukwu, Abuja
