Asks banks to maintain 60% LDR
In line with the commitment of the Governor of Central Bank of Nigeria (CBN), Mr. Godwin Emefiele, to ramp up activities in the Nigerian economy in his second term, the apex bank has taken fresh steps to channel more funds to the real sector as loans, THISDAY has learnt.
The CBN has therefore directed commercial banks to maintain a minimum Loan to Deposit Ratio (LDR) of 60 per cent effective from September 30, 2019.
The new LDR is lower than the 80 per cent it was previously.
The Head of Research and Strategy at FSDH Merchant Bank, Mr. Ayodele Akinwunmi, told THISDAY last night that the policy would make more money from banks’ customer deposit to be channelled as lending to the real sector of the economy.
According to him, it could unlock over N1.5 trillion for lending to the sector.
The central bank conveyed the decision on the new lending policy to the banks in a July 3, 2019, letter addressed to them, which was signed by the Director of Banking Supervision, CBN, Ahmad Abdullahi.
The LDR is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposit.
If a bank’s LDR is too high, it may affect its liquidity level and ability to lend.
CBN said in the letter to the banks that the new LDR would be subject to quarterly review.
“To encourage SMEs, retail, mortgage and consumer lending, these sectors shall be assigned a weight of 150 per cent in computing the LDR for this purpose. The CBN shall provide a framework for classification of enterprises/businesses that fall under these categories.
“Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50 per cent of the lending shortfall of the target LDR. The CBN shall continue to review development in the market with a view to facilitating greater investment in the real sector of the Nigerian economy,” it said.
Welcoming the new policy, Akinwunmi, said it would make more money from banks’ customer deposit to be channelled as lending to the real sector of the economy.
“Given the positions of customer deposits and loans of commercial banks in Nigeria as at December 2018, if bank are to comply with the directive from the Central Bank of Nigeria, over N1.5 trillion additional money will be available as credits to the real sector of the economy.
“It is also possible that commercial banks may sell down some of their holding of fixed income securities in their portfolio to enable them to meet the regulatory requirement, this may lower price with a possibility of increasing yields on fixed income securities.
“However, it is also important to address those hindrances to lending in Nigeria, otherwise lending in the name of complying to meet regulatory requirement may lead to a rise in non-performing loans,” he added.
But analysts at CSL Stockbrokers Limited, said the new measure would be punitive as it would be “a levy of additional Cash Reserve Requirement (CRR) equal to 50 per cent of the lending shortfall of the target LDR.”
“The affected banks will be Zenith Bank, Guaranty Trust Bank, FBN Holdings, United Bank for Africa and Stanbic IBTC. However, this is assuming that loans and deposits figures have remained stagnant since Q1, which is highly unlikely. Since many of the affected banks are the big banks, we believe the implication may not be as disastrous as would have been if smaller banks were the most affected considering many of the big banks have adequate capital and would typically have access to better quality loans.
“Nevertheless, requesting banks to increase loans by about 20 per cent in a short period will ultimately result in a build-up of non-performing loans (NPLs).
”That said, in our view, this move does not address the fundamental question of why commercial banks have abandoned their traditional role of financial intermediation- mobilising deposits and granting loans to individuals and corporates and have rather concentrated on investing in government instruments,” the research and financial advisory firm said.
According to the firm, the low risk appetite among banks for lending to the real sector could be attributed to attractive yields on government instruments on the back of aggressive government borrowings to bridge fiscal deficits, high risk in the operating environment which had hindered the survival of small and medium and tepid demand from SMEs owing to the high cost of securing loans- brought about by the high interest rate environment.
Emefiele, in his new five-year policy target unveiled last week, had said he would work with the fiscal authorities to ramp up the country’s Gross Domestic Product to double-digit.