By Emeka Anaeto
Deposit money banks are reassessing their strategy to meet the new minimum Loan-to-Deposit Ratio, LDR, of 65 percent prescribed by the Central Bank of Nigeria, CBN, mid last year.
This followed the insistence of the apex bank in ensuring the bank’s credit portfolios are not tainted with dummy loans to customers and other forms of credit recycling that end up in huge investments in the Nigerian Treasury Bills and other fixed income securities.
CBN had in the first week of this year debited about 12 banks with N600 billion as sterilization for Cash Reserve Requirements, CRR, a penalty for the margin of default in meeting the 65 percent LDR as at end December 2019.
Financial Vanguard investigations had revealed that some of the offending banks were relying on possible reversal of some of the debits as the apex bank did in October after debiting them with N500 billion over the same offence.
A source in one of the effected banks told Financial Vanguard that the banks are now reviewing their credit strategies to comply with the LDR requirements to avoid liquidity pressures arising from the sanctions. He said most of the banks would be meeting the target by end of first quarter 2020.
If they eventually make the target they would have created additional N1.5 trillion new loans between third quarter 2019 and the first quarter of 2020.
It would also mean that the previous N829 billion created in the third quarter has been overhauled to shake off the dummy loans that are linked directly to investments in Nigerian Treasury Bills, NTB, presenting a clean record of additional credit to the economy.
CBN had abolished private individuals’ investment in the NTB apparently following the discovery of the dummy loans in the LDR portfolios of the banks which were diverted to NTB investments through the individual beneficiaries of the loans.
The apex bank had acknowledged the initial success recorded in the first increase in LDR in the third quarter, and had subsequently stepped up the measure in September 30, 2019 circular.
The circular addressed to all banks and titled, ‘‘Regulatory measures to improve lending to the real sector of the Nigerian economy’’, signed by Bello Hassan on behalf of the Director of Banking Supervision of the apex bank, stated:
‘‘The Central Bank of Nigeria (CBN) has noted the appreciable growth in the level of the industry gross credit, which increased by N829.40 billion or 5.33% from N15,567.66 billion at end-May 2019, to N16,397.06 billion as at September 26, 2019 following its pronouncements on the above initiative. In order to sustain the momentum and in line with the provisions of our earlier letter, the minimum Loan to Deposit Ratio (LDR) target for all Deposit Money Banks (DMBs) is hereby reviewed upwards from 60% to 65%.
‘‘Consequently, all DMBs are required to attain a minimum LDR of 65% by December 31, 2019 and this ratio shall be subject to quarterly review. To encourage SMEs, Retail, Mortgage and Consumer Lending, these sectors shall be assigned a weight of 150% in computing the LDR for this purpose.
‘‘Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall implied by the target LDR.
‘‘DMBs are required to continue to strengthen their risk management practices particularly with regards to their lending operations.
‘‘The CBN shall continue to review developments in the market with a view to facilitating greater investment in the real sector of the Nigerian economy whilst promoting a safe, sound and resilient financial system.’’
CBN has stated that the measure was aimed at growing the Nigerian economy through investment in the real sector.
The essence of this is for banks to lend more to customers, mostly the real sector of the economy while maintaining a safe and sound financial system.
However, the measures appeared to have been undermined by the banks’ risk-phobia forcing them to rather dump their lendable cash with the apex bank.
Reflecting on the interim outcome of the policy the Head of Research at FSDH Merchant Bank, Ayo Akinwunmi, had stated that when the CBN Circular was released that the banks would have to create an additional N1.5 trillion credit assets by September 2019 to meet the required minimum specified by the CBN. But the apex bank’s figures show that the banks were failing short of this figure.
However, Akinwunmi is of the opinion that the figures released by the CBN represent an impressive surge in lending at the backdrop of the CBN Circular.
He said with the development, more money from banks’ customer deposits would be channelled as lending to the real sector of the economy. He further argued that it is also possible that banks may sell some of the fixed income securities in their portfolio to enable them meet the regulatory requirement. If this happens it would amount to a major shift in the portfolio mix of the banks in favour of the productive sector of the economy.
Also the Lagos Chamber of Commerce and Industry has commended the Central Bank of Nigeria on the lending policy for deposit money banks.
LCCI’s Director-General, Mr Muda Yusuf, described the policy that focused on the Small and Medium Enterprises sector, retail, mortgage and consumer lending as a move in the right direction.
“The focus of the policy on SMEs, retail, mortgage and consumer lending under the proposed lending regime is laudable,” Yusuf stated.
He said that the Nigerian private sector had over the years grappled with issues of credit access, cost of credit and tenure of funds, adding that the challenges were more severe for MSMEs in the economy with huge financing gaps.
However, reflecting on the banks’ reluctance in meeting the CBN’s policy specifications despite the huge sanction a top executive in one of the effected banks said most of the banks would rather cushion the deductions by the CBN than dilute the quality of their loan book.
He stated: ‘‘Currently, the industry average non-performing loan (NPL) rate stands at 11% and in view of this, it would be logical for more buoyant banks to prefer parking a higher percentage of their deposits with the CBN than compromise on the profile of the borrowers it lends to.
‘‘The logic behind the resistance on the part of the affected banks is especially justified when the host of enforcement issues associated with NPLs is factored into the decision to either lend to riskier borrowers or park funds at the CBN.’’
Analysing the situation with the LDR policy implementation, analysts at FSDH Merchant Bank stated: ‘‘Looking at some of the teething issues and overarching problems with the CBN Circular, we proffer some recommendations that could ease its implementation:
‘‘The CBN Circular should have been issued on the back of extensive feedback from the relevant stakeholders in the industry as it only appears to address the issue from the perspective of the regulators, and this may hamper the goals the CBN is seeking to achieve. This position is supported by the relatively short compliance dates set by the CBN – less than three months in both instances- to make what is, by any metric, wholesale changes to a lending portfolio, a tall order for even the most sophisticated bank in an ideal market. DMBs in Nigeria cannot lay claim to any of these attributes and most will struggle to meet the deadline set by the CBN as evidenced by the mammoth CRR deductions a number of banks have faced.
‘‘An extension based on the aforementioned consultation with the relevant stakeholders will enable the CBN to set a workable timetable for implementation and buy immeasurable goodwill from the industry.
‘‘In conclusion, the introduction of a minimum LDR and the accompanying CBN Circular is a laudable development. However, good regulations have failed due to the lack of effective implementation and ineffective supporting structures. Hence, the CBN should be proactive in creating an enabling environment for the rules to be effective.’’