Moody’s: LDR’s Reduction Will Stimulate Consumer Lending


Obinna Chima
Moody’s Investor Service has said the Central Bank of Nigeria (CBN) recent directive that requires banks to maintain a minimum loan-to-deposit ratio (LDR) of 60 per cent by the end of September 2019, will go a long way to stimulate consumer lending in the country.

The global rating agency stated this in a note made available to THISDAY, yesterday.
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,” the regulator had added.

According to Moody’s, although the policy would not tighten banks’ funding positions, it would be credit negative as it was expected to, “force some banks to take out potentially riskier loans to meet the minimum LDR.”
“The directive aims to stimulate lending to the real economy. To motivate small and midsize enterprise (SME), retail, mortgage and consumer lending, loans to these sectors will be assigned a weight of 150 per cent when calculating the LDR for this purpose.

“Banks that fail to meet the 60 per cent minimum LDR will pay an additional cash reserve requirement (CRR) equal to 50 per cent of their lending shortfall.

“The CBN will review the ratio on a quarterly basis,” Moody’s explained.
It anticipated that the United Bank for Africa Plc and Union Bank would increase their loans by a combined N230 billion or about 1.5 per cent of the banking system gross loans as of March 2019, to meet the requirements.

“Access Bank Plc, Guaranty Trust Bank Plc, Zenith Bank Plc and First Bank of Nigeria Limited are unaffected because their LDRs already exceed the imposed floor.
“Midsize banks such as Fidelity Bank Plc, Sterling Bank Plc, and First City Monument Bank Limited are also unaffected,” it added.

According to the rating agency, greater lending to the SMEs and consumers, borrowers that some banks judge as too small and too risky, would likely increase banks’ asset risk.

It pointed out that consumer lending in Nigeria was hampered by lack of good household credit records and weak recovery enforcement, adding that midsize banks in the country tend to have higher exposure to consumer and that SME loans tend to report higher non-performing loan (NPL) ratios than large banks.

“Nigerian banks were still laden with bad debts at 10.8 per cent of gross loans as of March 2019. A CRR equivalent to 50 per cent of the lending shortfall will also increase banks’ effective cost of deposits.
“The additional CRR on an already-high level of 22.5 per cent will likely intensify deposit competition because more liquidity will be drawn from the banking system, increasing banks’ cost of funding, a credit negative,” it added.

Furthermore, the rating agency noted that higher LDRs would support loan growth recovery in Nigeria and support banks’ revenue.
Nigerian banks loans contracted 6.7 per cent in 2018 and analysts had predicted that loan volume would grow by about five per cent this year.