The Central Bank of Nigeria’s 65 per cent Loan-to-Deposit-ratio for Deposit Money Banks has been praised as a step in the right direction the potential to turn the economy around, reports Group Business Editor SIMEON EBULU.
Deposit Money Banks (DMBs) are known as drivers of the economy through their traditional role as lenders to businesses. Usually because of this function, the real sector and the banking industry are intertwined, as though one cannot survive without the support of the other. That of course is the reality.
As the Managing Director of JAIZ Bank, Hassan Usman put it at a media chat recently, “conventional banking is the business of taking money from surplus entities, transforming their maturity to those deficit entities using various kinds of pricing.”
He said you take money from a salaried person, money that could be taken tomorrow or could be delayed for one year and transfer the maturity of that and give it out as loan.” He said most of the functions that banks undertake basically “require transforming this money that is short and make it long because overtime, you get to know that these people will not come all at once and take it.
So you transform this short term money, keep some for those who will come tomorrow and give it for ninety days, one eighty days, or one year,” saying it is this long-term depositors’ funds that banks lend to the real sector and others that need it for various purposes and when obtained by manufacturers and other businesses, help to drive the economy.
The Central Bank of Nigeria (CBN) in its quest to make more credit available to the real sector and ramp up the growth of the economy through investments in the productive sectors of the economy, that it initiated the Loan-To-Deposit Ratio (LDR).
The apex bank initially fixed the LDR at 60 per cent but later revised it upwards to 65 per cent. In its letter of July 3, 2019 entitled: ‘Regulatory Measures to Improve Lending to the Real Sector and the Nigerian Economy,’ the regulator said the objective of the policy is to encourage Small and Medium Enterprises, retail, mortgage and consumer lending in the banking system.
To underscore its resolve to push through this measure, it warned that failure to meet the stipulated LDR shall result in a levy of additional Cash Reserve Requirement equal to 50 per cent of the lending shortfall of the target LDR. Any doubt as to the CBN’s resoluteness rein that banks in compliance and to wield the big stick on any bank(s) for non-compliance was erased in September when it pulled out over N499billuon from 12 banks deposits proportionately for falling short of the rule and in accordance with its correspondence of July 3, 2019.
Implication
Several things are already happening that will definitely have a huge impact on the economy in the coming months and years.
In the light of the new measure and the determination of the CBN to see it through, banks are forced to actively start looking for good and banksble projects and businesses to finance. In essence, they are now spending the same energy they use in recruiting new customers in also looking for viable businesses to invest in. This is so because the more deposit they have, the more money they have to loan out in order to meet up with CBN Loan-to-deposit (LDR) ratio, said a financial expert.
The new measure, he argued, has equally forced banks to restructuring their loans by increasing the loan term and decreasing the interest rate, so as to make their loan packages more attractive and also reduce the number of bad loans, They will rather, his opinion, “receive much less than the 23 per cent interest they are used to, instead of losing the money entirely to CBN. This is another wonderful news for entrepreneurs, as they will now have more time to repay their debts and they will spend less money on servicing it, adding that if this policy is sustained, it has the potential to change the business landscape in Nigeria and positively impact on businesses across board.
Outcome
The CBN has aleady noted that the credit level in the banking sector since the lDR came into effect has grown by N829.4 billion or 5.33 per cent at the end of May from N15.56 trillion to N16.39 trillion as of September 26, 2018 according to a letter by the Director of Banking and Supervision, Bello Hassan to all banks.
It said: “The Central Bank of Nigeria has noted the appreciable growth in the level of the industry growth credit, which increased by N829.4billion or 5.33 per cent from N15.56 trillion at end of May 2019 to N16.39 trillion as at September 26, 2019 following its pronouncement on the above initiative.
“In order to sustain the momentum and in line with the provisions of our earlier letters, the minimum Loan to Deposit Ratio target for all Deposit Money Banks is hereby reviewed upwards from 60 per cent to 65 per cent.
“Consequently, all DMBs are required to attain a minimum LDR of 65 per cent by December 31, 2019 and this ratio shall be subject to quarterly review. To encourage Small and Medium Enterprises, retail mortgage and consumer lending, these sectors shall be assigned a weight of 150 per cent in computing the LDR for this purpose,” warning that 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 implied by the target LDR.
He said DMBs are required to continue to strengthen their risk arrangement practices particularly with regard to their lending operations. The CBN said it would continue to review developments in the market with a view to facilitating greater achievement in the real sector of the Nigerian economy, while providing a safe, sound and resilient financial system.
Reactions
The Managing Director, SunTrust Bank Limited, Ayo Babatunde said the CBN may have taken the action to ensure that banks did not report paper profits on Non Performing Loans (NPLs).
Babatunde, who spoke at a seminar organised by the Money Market Workgroup of Financial Market Dealers Association (FMDA) in Lagos, highlighted the challenges banks are facing.
He said the CBN policy, mandating banks to lend 60 per cent of their deposits by September 30, may push some of them to increase lending to high risk-borrowers with the potential of incurring heavy losses.
The guideline, he said, directed banks to improve lending to the real sector and maintain a minimum loan to deposit ratio (LDR) of 60 per cent (compared to the sector’s LDR of 58.5 per cent as at May and regulatory maximum of 80 per cent), subject to quarterly review.
To ensure lending to Small and Medium Enterprises (SMEs), retail, mortgage, and consumers, Babatunde said the CBN assigned a weight of 150 per cent to them in the computation of LDR.
Babatunde said specific guidelines were required to clarify whether the LDR computation would be based on gross or net loan position.
Also to be clarified is whether earlier exposure to the preferred sectors can be aggregated for the LDR computation and likely forbearance to banks with high NPLs to the preferred sectors, such as SMEs, retail, mortgage and consumer lending.
The economy, he said, grew by two per cent year-on-year in the first quarter, adding that the pace of growth was slower than the 2.4 per cent growth recorded in the fourth quarter of 2018.
The CBN, Babatunde said, cut the Monetary Policy Rate (MPR) by 50 basis points to 13.50 per cent, highlighting concerns over output growth.
On key developments in the money market, Babatunde said: “Drop in Open Market Operations (OMOs) and Nigerian Treasury Bills (NTBs) rate from 15 per cent to 13.2 per cent and 14.95 per cent to 12.8 per cent.
“Relative stability in exchange rate to N359/$ in the parallel market, N360/$ at the Investors and Exporters (I&E) Foreign Exchange Window and N356/$ at the Secondary Market Intervention Sales Retail (SMIS). There is also improved accretion to foreign reserves by $1.31 billion to $44.7 billion.”
He called for de-risking and improved perception of the banking industry and balancing mechanism to even out the demand for and supply of funds.
The Nigeria Employers’ Consultative Association (NECA), on its part, has applauded the Central Bank of Nigeria (CBN) over its directive to the commercial banks to maintain a minimum Loan Deposit Ratio (LDR) of 65 per cent. The body said this will aid the growth of the real sector of the economy.
In a chat with The Nation, Director-General of NECA, Mr. Timothy Olawale said considering that access to funding is a major challenge for the manufacturing sector in the country, the CBN directive is a welcome development as the real sector has over the years suffered due to stringent conditions to access needed capital. Olawale said this attempt by the CBN is worthy of commendation considering that over N1.5 trillion additional money will be available as credit to the real sector of the economy from this policy.
He is however concerned about improving the flow of the needed credit to the private sector to stimulate growth, including what he termed as “unorthodox methods” being deployed to achieve this objective if effective monitoring mechanism is not put in place.
“Forcing the banks to lend under the current macro-economic situation will only result in a likely build-up of non-performing loans in the medium to long term, given the sluggish growth in the economy and the high risk in the operating environment. This could pose a risk to financial stability,” the NECA chief said.
He said the interest rate charged by financial institutions is another source of worry for businesses. “With the volatility of the Nigerian economy and the unpredictable regulatory environment, the risk of a double digit interest rate could be too high for businesses, especially the Small and Medium Enterprises that are supposed to also be beneficiaries of the directive,” he said.
Olawale, therefore, urged the CBN to do more than give directives but also ensure the effective implementation and monitoring of the directive, “ saying more deliberate efforts should be made to ensure a hospitable business environment that will make lending attractive and borrowing by the real sector even more attractive,” he said.
Cheery news
A financial analyst, urged businesse operators to take a look at the banks that fell into the CBN hammer on their failure to meet the initure LDR target. “If you are already in business and have a business account with any of the most affected banks, then I will advise you to package your business proposal and meet with your account officer. Believe me, they are extremely motivated right now to listen to you.”
However, the analyst who asked that his identity be veiled, warned that “this does not mean that they are going to give out loans recklessly, because this can equally lead to their downfall. So it is important that you prepare yourself very well.
“I will advise you to do the following before approaching your bank: Make a good business plan, showing clearly your financial plan, break-even, etc.. These are the major indices they will be looking for.
“Carefully calculate the cost of finance. Make sure you present a cost that will be favorable to your business, you don’t have to accept whatever cost the bank gives you anymore. You now have room to prepare a better financial cost for your business, so make sure you understand every hidden cost of finance.|
The analyst urged customers and potential ones not to limit themselves to one bank only. He said: “Start with the banks that are already in default, but do not ignore other great banks that are meeting up with their quota. These banks although smaller, are more SME focused and thus were able to meet up with the CBN directive. So pay some attention to them as well.”
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