The Central Bank of Nigeria (CBN) has clarified that the N499.1 billion which it debited some banks for failing to meet its 60 percent minimum Loan to Deposit Ratio (LDR) is not a fine but would be refunded whenever the lenders meet the threshold.
Ahmad Abdullahi, CBN director, Banking Supervision Department, made the clarification during a press conference on the outcome of the Bankers Committee meeting in Abuja on Thursday.
“If, for instance, your LDR is 57 percent, 50 percent of the 3 percent will be taken from your bank and kept until when you improve on your lending,” Abdullahi explained.
The CBN had in July asked banks to lend a minimum of 60 percent of their customers’ deposits, failure of which would result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall of the target LDR by October 1.
At the end of the September deadline, some N860bn, mostly retail credit, was advanced to the economy just in 11 weeks while a dozen lenders which failed to meet the threshold were debited some N499.1bn debit by the apex bank.
Abdullahi also assured that the entire banking industry is committed to supporting the real sector now and that it cannot be business as usual.
“We are going to diversify the economy, we are going to provide credit to the real sectors to ensure sustainable growth and development of the economy,” he said, noting that the banks’ credit system has largely been driven by oil and gas which is not sustainable.
“The real sector of agriculture, manufacturing and so on for some time has suffered from stunted growth and there is this realisation among the banks that this is the way to go, hence the endorsement of the CBN policy regarding the real sector,” he said.
He, however, discountenanced the notion that the new LDR policy could lead to a further build-up in the non-performing loans.
“There is a mechanism in place that as part of the documentation by banks, there will be a clause that an obligor will sign that if for any reason the loan that is taken goes bad, then the bank has the right to set off against any amount that the obligor will have in the system.”
That is one of the major measures that is being taken to make sure we don’t have built-up NPLs,” he said.
Ebenezer Onyeagwu, group managing director, Zenith Bank, who equally briefed journalists on the outcome of the meeting, explained that the CBN never stated that debits were fines, but that at the deadline, any bank which does not meet the threshold would have funds debited from it and set aside and added to its Cash Reserve Ratio (CRR).
“So what you have is neither a fine nor a levy, but it is just a shortfall based on the parameters that the CBN has set. However, even if at the cutoff point of September 26th adopted by the Central Bank you were short of the LDR, CBN would look at your figures subsequently and where you achieve a loan growth, you’ll have a refund, but if you also have a drop in your deposit compared to that cutoff, you will now have debit,” Onyeagwu said.
He explained that policy is a continuous process and the whole essence is to ensure that lending to the economy is not just a one-off growth, but a continuous process of creating an enabling credit in the system.
The lenders also affirmed that the CBN 60 percent LDR threshold helped them create as much as N860bn credit to the economy in just 11 weeks.
The regulator has raised the LDR threshold to 65 percent by December, but banks say they are now committed to helping the fragile economy through lending and are encouraged by the CBN incentives to play their financial intermediation roles.
The lenders said their comfort in boosting consumer lending and the economy comes from some critical reforms that the CBN has implemented to eliminate fraud in the banking system, especially the BVN.
“On the Loan to Deposit Ratio, the CBN can rest assured that they have the commitment of the banks to support the initiative,” Onyeagwu said.
He mentioned some incentives created in the market place to enable the lenders create credit culture in the economy which was lacking before now.
“There is a lot more incentives for us to create loan. One of them is using the capability of the BVN, which now makes it possible for a delinquent borrower to be traced within the system,” he stated.
“This is interesting because the biggest challenge we have in creating loan in character, but with what we have now, the high level of defaults cannot happen. That is an incentive.
“Also by reason of what the CBN has done, there is a lot more intervention schemes available now, like the creative sector, the AGMEIS, the differentiated CRR; these are new incentives that have come up to enable and encourage banks to create more loans.
“Again this is our country and the potential here remains very enormous. So it’s about us harnessing our potential together for the real sector, retails and everybody together, we can now create a more lending and credit culture,” he said.
Akin Dawodu, MD, Citibank Nigeria, said the changes in the environment have improved the credit risk management of the bank and other industry and that would help protect banks’ balance sheets even when the LDR increases.
“The BVN is a very fundamental reform that has a lot of ramifications for banking primarily,” he said. “So with it, the issue of fraud or identity theft which has been a huge challenge to retail banking is now quite difficult of impossible. The institution risk management instrument is now much strengthened and this would help manage the likelihood of non-performing loans in the future.”
ONYINYE NWACHUKWU, Abuja
