Amechi Ogbonna
Although it has always been part of man’s nature to thread the lines of least resistance, those who make much difference in the world often tend to ride the storm.
In the annals of Nigerian banking industry, the tendency has always been for chief executives of financial institutions to welcome with both hands all policies of the Central Bank of Nigeria (CBN) to improve the fortunes of the real sector, only to sabotage them later for pecuniary gains.
This sentiment becomes a challenge in Nigeria where investing in sovereign gilt-edge securities with its guaranteed maximum returns is rather crowding out private sector manufacturers who are equally contending with several macroeconomic headwinds make loan repayment to banks quite unpredictable.
The trend therefore explains why despite being the livewire of the nation’s economy, Nigeria’s small and medium enterprises have largely been left to rot, and evidently starved of funds to expand and create jobs, even when unemployment indices have risen to over 25 per cent while real GDP growth is stunted at less than 2 per cent.
It was perhaps against this backdrop that the Central Bank of Nigeria, in September this year took another bold step at raising banks Loan to Deposit Ratio (LDR) to 65 per cent from 60 per cent, earlier.
A directive from the apex bank in that instance wrote, “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 per cent. 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 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,” .
In taking that decisive policy initiative, which was very unpopular with the leadership of the nation’s over 28 commercial banks, the apex bank was convinced that most of Nigeria’s financial institutions were increasingly becoming reluctant to lend to the real sector, and especially the millions of SMEs spread across the country, thereby limiting their ability to grow and create jobs for the unemployed youths.
On the other hand, most observers had taken notice that the nation’s Deposit Money Banks’ apathetic disposition toward real sector financing has a direct correlation with its unprecedented non-performing loan size which spiked between 2016 to 2018 on the behest of a recession that affected most real sector operators.
From all indications, the economy’s financial fragility has since taken a turn for the worst, with NPLs ratio soaring to 12.9 per cent at the end of 2016, above the prudential threshhold of 5.0 per cent. But while there may be adequate provisioning for these loans, the sustained rise in NPLs would naturally affect the capacity of banks to carry out effective financial intermediation roles to services the needs of the SMEs and the entire real sector. That also explains why many banks have been unwilling to book any more credit they perceive could become delinquent under prevailing economic circumstances, preferring rather to trade in government securities.
A non-performing loan is borrowed fund, for which the debtor has not made scheduled payments (principal or interest) for at least 90 days, and these constitute the major cost in the profit and loss account of banks and generally precede banking crises.
A spike in non-performing loans generally indicate bad business for banks and constitutes a risk to financial system stability, which generally can be triggered by macroeconomic inbalances, bank-specific deterioriation, as well as institutional and global factors.
For instance, a deliberate disregard for corporate governance principles in any financial institution could easily trigger NPLs spike, that may lead to its eventual crash.
But regardless of the reasons adduced for non-compliance to credit limits set by financial sector regulator, the need to keep the economy running especially in times of slow GDP growth, underscores the relevance of a strong oversight duties and perhaps, interventions that can generate further stimulus for the real sector growth.
And so when the Central Bank of Nigeria, on July 3, 2019, directed banks to maintain a minimum Loan Deposit Ratio (LDR) of 60 per cent by September 30, 2019, it was with a view giving fresh impetus to the moribund real sector.
The LDR, now being reviewed quarterly to improve lending to the real sector, was 58.5 per cent as at May but was later raised to 65 per cent for the last quarter of the year.
A CBN circular: “Regulatory Measures to Improve Lending to the Real Sector of the Nigerian Economy,” said the review of the parameter was to ramp up economic growth through investment in real sector. “Failure to meet the above minimum LDR by the specified date shall result in levy or additional Cash Reserve Requirement equal to 50 per cent of the lending shortfall of the target,” CBN Director, Banking Supervision, Ahmad Abdullahi, said in the July 3 circular. Based on the guidelines, failure to meet the minimum loan to deposit ratio of 60 per cent by October 1 would attract a levy of fine which is additional CRR equal to 50 per cent of the lending shortfall of the target.
According to the Governor Godwin Emefiele, banks that fail to meet its directive on the 60 per cent LDR would be penalised at the expiration of the deadline.
However the LDR policy is expected to push banks to increase lending to high risk-borrowers, with the potential of incurring heavy losses and higher non-performing loans.
It is part of its efforts to intervene and improve lending to the affected businesses to boost the economy and create jobs.
It further prescribed that lending to SMEs, Retail, Mortgage and Consumer lending, shall be assigned a weight of 150 per cent in computing the LDR for this purpose, warning however that 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.
Statistically, a bank’s LDR is calculated by comparing its total loans to total deposits for the same period. A high loan to deposit ratio means that the bank is issuing out more of its deposits in loans.
But in order to ensure maximum compliance, the CBN stated that where banks default in attaining the required LDR), 50 per cent of the lending shortfall of the target LDR should be paid as additional CRR. The rationale behind the CBN Circular is perhaps to compel banks to lend in an economy still recovering from a contraction that caused bad loans to surge.
Apparently not satisfied with their response, the CBN on September 30, 2019, through another circular BSD/DIR/GEN/LAB/12/049, reviewed the LDR target for DMBs upwards from 60 per cent to 65per cent, citing appreciable growth in credit for its action and set a new deadline of December 31, 2019 for them to comply with the new threshold. It warned also of the dire consequences of non -compliance by the operators.
But to demonstrate that it’s threat of sanction was not a fluke, the regulator hammered about 12 DMBs for breaching its guidelines on lending to the real sector of the economy to the tune of N499.1billion.
According to an approved debit instruction, the affected banks and the amount payable by the defaulting banks include: Citibank (N100,743,055, 321); First Bank of Nigeria (N74,668,880,480); FBNQuest Merchant Bank (N2, 697,456,144); First City Monument Bank (FCMB), (N14, 371,064, 742) and Guaranty Trust Bank (N25, 147, 933, 628).
Others are Jaiz Bank (N7, 525, 165,552); Keystone Bank (N4, 162, 938, 879); Rand Merchant Bank (N2, 823,177,399); Standard Chartered Bank (N30,027,137,984); SunTrust Bank (N1,703,205,427); United Bank for Africa (N99,676,181,916) and Zenith Bank (N135,629,337,625).
Commenting on the apex bank’s decision, Head of Research at FSDH Merchant Bank, Ayo Akinwunmi, noted that when the CBN Circular was released that the banks would have to credit an additional N1.5 trillion credit assets by September 2019 to meet the required minimum specified by the CBN. In the intervening period between the release of the CBN Circular and the supplement, the CBN claims that industry gross credit has increased by N829.40 billion or 5.33per cent from N15,567.66 billion at the end of May 2019 to N16,397.06 billion as at 26 September 26, 2019. The logic behind the anticipated hesitation on the part of these 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.
Although the CBN had promised to release further guidance on what entities would fall under the scope of the ‘SMEs, Retail, Mortgage and Consumer lending’ category, some commentators are concerned it was yet to so, which they see as a further indication of the vague qualifications businesses of specifically protected by the CBN Circular.
In a memo signed by the Director of Banking and Supervision, Bello Hassan, to all banks on, “Regulatory measures to improve lending to the real sector of the Nigerian economy, the CBN said, “The Central Bank of Nigeria has noted the appreciable growth in the level of the industry growth credit, which increased by N829.4billion n or 5.33 per cent from N15.56trilion at end of May 2019 to N16.39trillion as at September 26, 2019 following its pronouncement on the above initiative.
“DMB 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.
According to the CBN’s recent statistics, banking sector credit sector recorded a 5.33 per cent growth from N15.57 trillion at the end of May 2019, to N16.40 trillion as at September 26, 2019,
This follows some of its new measures to grow the Nigerian economy through investment in the real sector.
Commenting on the development, Ayoola Olukanni, the director general of the Nigeria Association of Chambers of Commerce, Industries, Mines and Agriculture (NACCIMA), said the CBN’s LDR policy has activated more aggressive marketing of loan products by commercial banks.
The NACCIMA boss said : “Feedback from our members who are manufacturers reflected the fact that funds are currently easier to access to fund their business.”
He recalled that NACCIMA has consistently advocated for access to single-digit-interest finance for the real sector since President Muhammadu Buhari’s administration assumed office, stressing it has become a crucial factor for improving capacity utilisation in the industrial sector. “We see this as a deliberate policy to ensure that there is greater access to finance. It is our position that at the very first instance of implementation of this policy, industrial sectors that are able to guarantee sufficient returns to justify the high cost of funds will start to expand,” Olukanni said.
He added that the implementation of the CBN’s directive on LDR would have two-fold implications for the economy including the expansion of the real sector in the areas of high-margin potential leading to employment growth and increased contribution to national output from those sectors as well as strengthening the financial system based on the revenue interests .that will accrue from the initiative’
For his part, Mr Muda Yusuf, the director general of the Lagos Chamber of Commerce and Industry (LCCI), said the new lending policy would improve the quality of financial intermediation to the real sector in such a manner that would impact the economy better as funding gaps in many sectors have started narrowing down.
Yusuf said the directive had also reduced the crowding out of the private sector in the credit market and improved economic/ financial inclusion with more SMEs and broader range of sectors having better access to credit.
“In addition, it has enhanced the deepening of the money market, the promotion of economic diversification in line with the Economic Recovery and Growth Plan (ERGP) and improved the purchasing power as consumer credit increases.