In June 2019, when the Central Bank announced a new policy measure requiring Deposit Money Banks to maintain a minimum of 60 percent Loan to Deposit Ratio (LDR), the objective was to make more credit available to economic actors across the country to enable them create greater wealth and jobs.
To underscore its imperative, the apex bank after barely four months of observing market trends around the policy further raised the bar to 65 percent sending some shock waves among bankers and other economic observers.
In its estimation, the Godwin Emefiele- led apex bank believes it was economically more beneficial to deploy the billions of idle funds sitting in banks’ vaults to a real sector seemingly crowded out of the credit market by heavy public sector borrowings than to allow such sit in the CBN earning just interest that adds value only to bankers.
Today, the LDR policy seen by many lenders as a rather risky venture amid recent economic headwinds that hit government’s revenues, has run for barely one year, with analysts now having an ample room to assess its impact on the domestic credit market.
However, the critical question at this point remains whether government’s objective for rolling out the policy is being achieved as intended by making credit available to the real sector amid two major economic headwinds seen within the trial period that began in June of 2019.
Another key question is whether the economy has indeed recorded a remarkable increase in banking credit to the real sector since its introduction.
In its circular to all banks, the CBN said the minimum Loan to Deposit Ratio (LDR) target for all Deposit Money Banks (DMBs) was to 65 percent to stimulate access to loans to those in need of it for economic reasons.
The circular titled: ‘Regulatory measures to improve lending to the real sector of the Nigerian economy’, it stated that the upward review was necessitated by a noticeable “growth in the level of the industry’s gross credit”.
The apex bank explained for instance that the industry gross credit increased by N829.4 billion or 5.33 percent from 15.5 trillion at the end of May 2019 to N16.3 trillion as at September 26, 2019.
Furthermore, September figures from the regulator after the review of the LDR threshold, showed that banking sector’s credit to private sector rose to N25.47trillion in the month under consideration, thus setting a new record for the year, amid concerns that the development could trigger a possible spike in banks’ NPL portfolios if measures were not taken to stem a trend that had hit 6.5 percent at the end of October of 2019.
These numbers though phenomenally high for the industry over the third quarter of 2019, in the face of a harsh business environment in the country then, points to a new normal bank deposits should be made to work for the economy.
Still counting on the gains of the LDR update in July 2020, as revealed by the CBN money and credit statistics, it was reported that total banking sector credit to the private sector rose by N757 billion to N30.2 trillion, while credit to the government accelerated from N8.86 trillion to N9.52 trillion in July 2020, with some analysts arguing that the Federal Government’s huge financial injection and interventions through fiscal and monetary should be redesigned to create a better impact with more investment focused on agriculture value chain including storage and processing industry, transportation and capacity building for those engaged in these critical sectors. According to them, training and education of farmers, storage facilities and transportation network, would facilitate the movement of agricultural produce to the market from the farms.
Commenting on the impact of the 65 percent Loan to Deposit policy on the real sector so far, President of the Pharmaceutical Society of Nigeria (PSN) Mr Sam Ohuabunwa, argued that if the policy was adequately implemented, there would have been a lot more lending to the private sector with more liquidity in the market place. “But I don’t have the measure, so I can’t exactly say whether that has happened. I’m aware that the banks are becoming more willing to lend, but I’m not sure there has been any relaxation in the very tough terms and conditions they require because it’s one thing to agree to lend and another thing to simplify the conditions.
If the conditions remain stiff and the same way they have always been, you cannot still access the facility.”
So, I believe the banks ought to look at their requirements for lending so as to make sure the policy yields its desired purpose, which is to make more money available to businessmen and women in the private sector to create wealth and reduce poverty.
I have heard and noticed willingness of banks to give loans.
Banks have called me to come for loans ,but when I got there to ask for loan, I found out that the conditions and interest rates were not better and did not improve. So, I told them I didn’t need such money.
If the terms and conditions are still the same, then the policy may not achieve the desired objectives.
For credit to grow in the economy, the conditions and interest rates must be improved upon. If the terms and conditions are so stiff, with the situation remaining the same, then the objective might not be achieved.
The liberalisation of the CBN mandate that banks should increase the loan to deposit ratio percentage to 65 percent should reflect also in loosening and making less stringent requirements and looking for more innovative ways to let the money get to those who need them, so they can use and pay back.
Requirements or guarantee for loan is the major obstacle to getting loans. When they insist you must collaterise a loan, then there is a problem, because if you don’t have a bankable collateral, you can’t get the loan. This makes some business people go to third party collateral, and by the time they finish paying, they find out they don’t have any magin to live with.
So I will advise that the CBN and banks to walk away from where they are sitting and sit on the side of the small and medium entrepreneurs and understand how they can take the money and turn it into profit. Not just in bringing business plans and proposals, which can be dressed up.
When the bankers go to these business owners and find out the issues, they can now package what can enable them use the money in a manner that the money can be used and returned.
By that, the banks can reduce the possibility of the loan going bad and then reduce the percentage of non performing loans in their portfolio.
But if you just give money to people and they are desperate, sooner or later they find out they cannot add up, then there is a default.
So until the bankers put themselves in the place of the borrowers, especially smes, there will be incidents of foreclosure and default.
In the same vein, the Lagos Chamber of Commerce and Industry (LCCI) said the policy has improved liquidity in the banking system as lending rates have dropped significantly over the past one year.
The LCCI Director General, Muda Yusuf, however averred that despite the low interest rate, accessing the fund is still a big hurdle.
“Low interest rates is one thing, access to the funds is another. Many businesses, especially SMEs, have challenges meeting credit requirements of the banks. Collateral requirements remains a big issue,” he said.
He reasoned that one should also appreciate the perspectives of the banks as they have a responsibility to ensure the safety of their funds, which belongs to depositors. The LCCI boss lamented that in Nigeria there are also a lack of bankable projects.
“The risk profile of many real sector investments are high which makes banks reluctant to lend them money,” he said.
To improve the volume of bank credit to the economy and to businesses, Yusuf opined that there is a need to accelerate the process of derisking the business environment.
“We need to ensure a minimization of the risk of business failure. This is needed to give comfort to the lending financial institutions,” he stated.
As speaking on the issue, Dr.Timothy Olawale, director general of Nigerian Employers Consultative Association (NECA), said “We applaud the policy direction of the Central Bank of Nigeria (CBN) in encouraging lending to the Real Sector of the economy- SMEs, Retail mortgage and consumer lending, which motivated reviewing upwards the minimum Loan to Deposit Ratio of commercial banks from 60 to 65 percent was in line with our clamour for increasing funding windows to the Private Sector in order to reflate the economy in the right direction. Nevertheless, the monetary authority should be wary of taming the increasing inflationary rate, which could negatively affect the positive intentions. We call for more monetary and fiscal policies to stimulate consumer demands.
According to him, commercial banks, developmental banks and the supervisory department of CBN should be more guided against increasing Non-performing loans, in order to forestall collapse of our banking institutions, which could beset the economy at the precarious moment the economy finds itself. Continued strict maintenance of high risk management practices regarding lending operations should be adhere to.
With about N3.5trillion Intervention measures by the CBN, this portends to have sizeable impact on the economy, nevertheless, a thorough monitoring of its disbursement process should be guided, as stakeholders are still finding access to the policy stringent.
Commenting on how the 65 percent Loan to Deposit Ratio (LDR) has impacted banks’ lending to the real sector, a professor of capital markets and former Finance Commissioner in Imo State, Uche Uwaleke, described the policy as very impactful to the economy.
In a telephone conversation, Uwaleke said it was the huge success recorded in the LDR that gingered the Central Bank of Nigeria (CBN) to increase it from 60-65 percent n 2019, in a strategic move to free up more funds for the banks to lend out.
He said: “If the LDR was not a success, the CBN wouldn’t have had any need to increase it to 65 percent. The MPC in its communique talks about increase in the private sector growth since the introduction of 65 percent of LDR. It has created a larger window for lending by banks and has really yielded good results”.
Uwaleke, however, noted that the 65 percent LDR strategy was not enough to solve the lending challenges of the real sector.
According to him, there is urgent need for the CBN to maintain an accommodative policy.
“First, MPR should be reduced further from 11.5 percent because this will increase lending.
The CBN has to reduce the Cash Reserve Ratio from the current 27.5 to like 22.5 percent
“This will allow the banks to have more money to lend out. Banks are currently finding it difficult to maintain the current 27.5 percent CRR and that’s why the CBN keeps debiting the accounts of banks with them. This high CRR reduces the amount of money they earmark for loans.
“So, reducing the CRR to 22.5 percent will make the banks have more money to support the 65 percent LDR policy of the CBN”, Uwaleke explained.