Unlocking Consumer, Real Sector Lending


The Central Bank of Nigeria’s directive on minimum loan-to-deposit ratio to be held by banks will play a major role in stimulating economic activities in the coming year, writes Obinna Chima

In the next 48 hours, the deadline for banks to shore up their minimum loan-to-deposit ratio (LDR) to 65 per cent will elapse and market participants would be expecting the next line of action from the Central Bank of Nigeria (CBN).

The CBN had in July, directed commercial banks to maintain a minimum Loan to Deposit Ratio (LDR) of 60 per cent effective from September 30, 2019. However, at the end of September, the stipulated minimum level was raised to 65 per cent, with a fresh deadline of December 31, 2019.

But, the banking sector regulator had debited 12 banks that failed to meet the September deadline a total of N499,175,535,097, and there are expectations that those that do not meet this new deadline would also be penalised.

The CBN had said in a letter to the banks on the lending policy, stressed that the 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 (CRR) 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 had stated in a circular.
Interestingly, the CBN recently hinted of plan to further raise the minimum LDR level to 70 per cent by the end of 2020.

The central bank policy has since unlocked over N1.5 trillion consumer and real sector lending to the economy.

CBN Governor, Mr. Godwin Emefiele, said the credit conditions in the banking system has since improved due to the policy. According to him, banks in the country are now able to recover delinquent loans from customers’ accounts in other banks.

Emefiele said the measures had placed Nigerian banks in a much better position towards supporting a stronger economic recovery.

Stimulating Consumer Lending
To analysts at Moody’s Investor Service, the policy would go a long way to stimulate consumer lending in the country.
“The directive aims to stimulate lending to the real economy. To motivate small and mid-size 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 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 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.

Furthermore, the rating agency noted that higher LDRs would support loan growth recovery in Nigeria and support banks’ revenue.
On its part, the Nigeria Employers’ Consultative Association (NECA), has since commended the CBN over the policy, saying it would aid the growth of the real sector of the economy.

The Director General of NECA, Mr. Timothy Olawale, said considering that access to funding was a major challenge for the manufacturing sector, the directive remains a game changer.
He, however, expressed concern about a possible buildup of non-performing loans, which has reduced drastically to 6.6 per cent.

Also, the Director General, Lagos Chamber of Commerce and Industry (LCCI), noted that the bigger challenge for businesses in the country, has to do more with the operating environment.
“Firstly, many of the SMEs are not prepared. For them, they think you just walk up to the bank and collect the money, which is a major bottleneck.

“Then, the risk environment, which is not in the hands of the banks, is also a problem.
“If businesses are operating in an environment where there are too many challenges, it will be difficult for them to operate profitably and that affects the capacity to repay their loans,” he explained.

However, he said the banks would also need to be creative in how they access the SMEs.
“We should also have a good data bank for the profiling of SMEs and they should make better use of the credit bureau; they should be able to take more risks and not just to sit in the comfort zone of not wanting to take any risk at all.”

Furthermore, Yusuf said the new lending policy was a timely corrective measure to improve credit to the private sector, which had for years grappled with issues of credit access, cost of credit and tenure of funds.
He said: “The economy was characterised by profound crowding effect of the private sector in the financial markets owing to the diversion of credit to government through the instrumentalities of treasury bills and Federal Government bonds.”

The LCCI boss expressed optimism that the lending policy would impact the economy through quality financial intermediation while bridging the funding gaps in many sectors.
He said it would improve economic inclusion of more SMEs and promote economic diversification in line with the Economic Recovery and Growth Plan (ERGP).

Yusuf noted that the policy had the probability of reducing interest rate as supply of credit would increase and improve lending creativity and innovation by banks.

“This will result into a broader and more diversified sectoral coverage of lending,” he said.
The economist urged the CBN and the fiscal authorities to adopt measures toward addressing some possible risks in the lending policy.

He proposed the strengthening of the Collateral Registry to enhance the profiling of borrowers in the banking system, adding that the character of borrower had been identified as a major risk factor to lending in the economy.

Yusuf, called for scaling up corporate governance practices in the banking system to prevent insider abuse and compromise of credit assessment processes.

He submitted that credit guarantee framework should be strengthened to give comfort to the banks and also promotion of the use of credit insurance.
Yusuf urged the fiscal authorities to effectively address enabling business environment issues, particularly infrastructure deficit and quality, in order to reduce credit risk.

Allaying Fears of NPL Build up

The International Monetary Fund (IMF) had warned that the new regulations to spur lending, should be carefully assessed and may need to be revisited in view of the potential unintended consequences on banks’ asset quality, maturity structure, prudential buffers and the inflation target.

But in reaction, the CBN noted that the aggressive drive to increase lending to the private sector will not result in a gradual accumulation of non-performing loans (NPLs) in the sector.

The Director, Corporate Communications, CBN, Mr. Isaac Okoroafor, pointed out that with the lending clause introduced recently by the Bankers’ Committee, it would be difficult for habitual loan defaulters to operate in the sector.

With the clause, a lender would be able to recover its loan from the assets of a defaulter domiciled in another bank.
Okoroafor explained: “First of all, it is important for us to come to the realisation that the primary responsibility of banks is to act as catalysts, by being intermediary between the surplus sector and the deficit sector.”

According to him, a review of banking sector loan portfolio in Nigeria by the Monetary Policy Committee (MPC) showed that in the last one year, credit to the private sector has been flat.

He said: “What the MPC found out was that banking industry loan has been at best flat and in most cases, dropped. And the central bank felt that to encourage the banks, we need to be aggressive by prescribing for them what the minimum LDR should be.

“Yes, we have heard in some quarters that it will push up NPLs. That is not true. It is not true because we have put in a rule whereby those who have access to credit are people who genuinely do require those loans.

“In this case, we have introduced a clause, which we have mandated all banks to put in the offer letters to their customers. The clause states that by accepting the offer or by drawing the loan from a bank that I warrant that I would pay back the loan.

And if for any reason I don’t pay back the loan or abandon it and go to another bank to open an account, the central bank has the right to go to the new bank I opened account, take the customer’s money and pay off the loan.”
He added that what that meant was that the probability that somebody would either argue with his bank or go to court would not arise.