The Central Bank of Nigeria’s (CBN) reiteration of the 65 percent Loan-to Deposit ratio (LDR) means banks must create up to N1.2 trillion in loans to comply with the directive assuming that bank deposits do not grow this year.
The N2 trillion in loans created in the last 9 months of 2019 might be difficult to replicate this year as economic fundamentals in 2020 have weakened significantly compared to 2019.
For example, the Naira was recently devalued to N380/$1 compared to N306/$1 last year, foreign reserves dropped $8.97 billion in the last 9 months, inflation rate has increased by 89 basis points in the last one year and crude oil prices have dropped more than 50 percent since the beginning of 2020.
With the economic environment rapidly worsening, the odds of an economic recession this year are now back to 2016 highs, meaning 2020 may not be the best year to be creating risk assets considering recessions typically lead to poor asset quality for banks.
Meanwhile, commercial banks who are already facing significant impairments of their foreign currency loans to local businesses as a result of the recent devaluation by the CBN, might also want to tread cautiously in creating more loans as debtors now require more naira to payback their dollar denominated loans.
Recall that before the apex bank’s review of the LDR to 65 percent, commercial banks who couldn’t meet up to the initial 60 percent required LDR as of 30 June 2019 were fined almost N500 billion and
refunded after compliance was met. Reliable sources say CBN has also issued sanctions of up to N600b sanctions to banks who failed again to meet the required LDR as of 31 December 2019.
However, analysts say while they expect bank lending to the private sector to grow this year, they do not believe that the stellar credit expansion the industry witnessed last year will be replicated this year due to a more difficult economic environment and the fact that the industry is already close to achieving the 65 percent LDR target.
Wale Okunrinboye investment analyst at Sigma Pensions said “We will see growth and banks will nearly push to 65%. CBN have pushed banks from the low levels they were to where they are today which is not far off from the 65%.
“Meanwhile, relative to where the banks are coming from last year we won’t be there. There will be credit growth, but it won’t reach last year’s levels and also CBN will be a bit weary in pushing the banks since we have now had devaluation.”
However, the private sector having benefitted from increased lending by banks over the past year, might now be in need of even more credit as Covid-19 slows down economic activities leading to dwindling revenues and increasing financial obligations.
