Balancing Liquidity, Deposit-to-lending Ratio, NPLs, Banks Default in CBN 65% LDR Requirement in H1

Darasimi Adebisi

Following concerns over the need to balance between liquidity, deposit-to-lending ratios and check non performing loans, Tier-1 banks in the country failed to meet the Central Bank of Nigeria (CBN) 65 per cent Loans-to-Deposit Ratio (LDR) for the half year ended June 30, 202.

This is despite the CBN warning that failure to achieve the target would continue to attract levies of additional cash reserve requirement of 50 per cent of the lending shortfall of the target LDR.
The Tier-1 banks’ are Ecobank Transnational Incorporated (ETI) with a Nigeria subsidiary, Ecobank Nigeria, FBN Holdings Plc, Access Bank Plc, Guaranty Trust Holdings Company Plc (GTCO), United Bank for Africa Plc (UBA) and Zenith Bank Plc.

Analysis of the banks’ results revealed that in the last two years, they have continued to defy the apex bank LDR policy that mandated lending to real sector.

The apex bank in July 2019, announced an increase in the required minimum LDR to 60 per cent effective end of September 2019.

Upon review of the results of the policy, the CBN decided to raise the ratio higher to 65 per cent which banks were expected to comply with by the end of December 2019.

The CBN in coming up with the policy sought to trigger growth in a weak economy.

Aside Ecobank Nigeria that recorded 67.50 per cent LDR in H1 2021, from 70.10 per cent in H1 2020, all other Tier-1 banks reported LDR below the stipulated 65 per cent demanded by the CBN.

Specifically, Access Bank (Group) reported 51.70 per cent LDR in H1 2021 from50.70 per cent in H1 2020, while Zenith Bank Plc (Bank) LDR dropped to 61.60 per cent in H1 2021 from 64.50 per cent in H1 2020.

FBN Holdings’s (Group) LDR increased to 51.70 per cent in H1 2021 from 47.40 per cent in H1 2020 as UBA ‘s LDR dropped to 41.90 per cent in H1 2021 from 43.20 per cent in H1 2020.

In addition, GTCO (Group) reported 46.28 per cent in H1 2021 from 49.42 per cent reported in H1 2020.
The data obtained from CBN website by THISDAY showed that the Nigerian banking industry LDR stood at 61.97per cent as at June 2021.

The last time the LDR was above the regulatory threshold was December 2019 when it stood at 68.46per cent.
Lenders have been cautious of extending credit to the private sector due to the country’s economic downturn, occasioned by the impact of COVID-19, which crippled global economy between March and November last year and oil price that dipped to $29 in May 2020.

As a result, Nigeria slipped into recession in the second quarter of last year, the second time in four years, before recovering in the fourth quarter.

Despite aggressively growing customers’ base, and sustained increase in loan & advances to customers, the Teir-1 banks between 2019 and 2020 have come short of meeting the LDR policy of CBN.

Banks lost N8.3 trillion to the CBN as the apex bank maintained its strictness on Nigerian creditors in 2020, as banks face sanction over LDR ratio.

Further analysis of the banks numbers revealed that UBA among the investigated Tier-1 banks has the lowest LDR in the two years under review.

The pan-African bank gross LDR dropped to 43.20 per cent in 2020 from 52.9 per cent in 2019.

A reliable source in UBA, said: “the LDR requirement is for the Group’s operation in Nigeria and not on the overall Group. Hence, the estimated of LDR is for the purpose of CBN regulation is meant for Nigeria business. UBA has grown loans and deposits, than industry average in Nigeria over the past two years.”

The same LDR is applicable to other banks, as this report covers data released by these banks in the period under review.

Access bank with 62.1 per cent LDR in 2019 reported 50.7 per cent in 2020, a decline of 11.4 per cent while GTCO’s LDR closed 2020 at 43.2 per cent from 60.62 per cent reported in 2019.

On its part, FBN Holdings Plc reported LDR of 46.8 per cent in 2020 from 48 per cent in 2019.

Commenting, the Vice President, Highcap Securities Limited, Mr. David Adnori stated that the demand by CBN on 65 per cent LDR is a difficult task, stating that, “Loans are granted to borrowers’ in-line with the cannon of lending.”

He added, “Every bank has it peculiarity of lending to real sector in terms of existing exposure to client; how those funds are performing? Also, the kind of deposit they have to extend lending to real sector. Lending to real sector is not something that can be regulated.”

Analyst at PAC Holdings, Mr. Wole Adeyeye decried Tier-1 banks caution at lending to real sector amid Non-performing Loans (NPL) reduction.

According to him, “Most of these Tier-1 banks are being careful with the level of their non-performing loans and this is the reason why they have NPL that is below five per cent, which falls within the CBN regulatory requirements.”

The CBN had recently pointed out that failure to achieve the target would continue to attract levies of additional cash reserve requirement of 50 per cent of the lending shortfall of the target LDR.

“The CBN has noticed remarkable increase in the size of gross credit by deposit money banks (DMBs) to customers. Accordingly, the CBN has decided to retain the minimum 65 per cent LDR in the interim. All DMBs are required to maintain this level and are further advised that average daily figures are to be applied to assess compliance going forward.

“The incentive which assigns a weight of 150 per cent in respect of lending to SMEs, retail, mortgage and consumer lending shall continue to apply, while failure to achieve the target shall continue to attract a levy of additional cash reserve requirement of 50 per cent of the lending shortfall of the target LDR on or before March 31, 2020.

“DMBs (Deposit Money Banks) are further encouraged to maintain strong risk management practices regarding their lending operations. The CBN shall continue to monitor compliance, review market developments and make further alterations in the LDR as it deems appropriate, ”it stated.

Also commenting, the CEO of Enterprise Stockbrokers, Mr. Rotimi Fakeyejo explained that because the economy is undergoing crisis, there are no good credits which are seeking for funding.

According to him: “So, if the banks have to lend, they have to lend to some prime consumers. The banks need to consider if they have enough request to be able to meet that threshold.”

He also noted that banks have a lot of their funds warehoused in the Central Bank in form of Cash Reserve Ratio (CRR), this puts a lot of pressure on them in terms of lending.

“Banks have to balance between liquidity and deposit-to-lending ratios. These factors to be considered before meeting this requirement,” he added.

The CBN governor, Mr. Godwin Emefiele at the last Monetary Policy Committee (MPC) in September said the MPC noted improvement in lending to the real sector following the introduction of the LDR in 2019. According to him: “Industry gross credit increased by N6.63 trillion from N15.57 trillion at end-May, 2019 to N22.20 trillion at end-July, 2021. The credit growth was largely recorded in manufacturing, oil and gas and agriculture sectors.”

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