As part of measures to increase lending to the private sector and accelerate economic growth, the Central Bank of Nigeria (CBN) would soon commence monthly monitoring of loan to deposit ratio (LDR) threshold of commercial banks. Billed to begin from September 30, the policy is one of the outcomes of the recent meeting of the Monetary Policy Committee (MPC) of the CBN.
Under the new plan, commercial banks are required to meet a minimum of 60 per cent of loan to deposit ratio by September 30. Failure to meet the minimum requirement will result in a levy of additional Cash Reserve Requirement (CRR) which is the minimum amount of the total deposits that commercial banks are statutorily required to keep as reserve with the apex bank.
According to the CBN Governor, Godwin Emefiele, the new policy has become necessary to mitigate the amount of credit risks in the financial market through the creation of viable scoring system similar to what is obtainable in developed economies. It is also aimed at encouraging banks to grow their credit portfolio.
We support the new plan and believe that it would stimulate economic growth in the country. Hitherto, the flat loan to deposit ratio is 57 per cent which is considered too low to make economic impact in the real sector of the economy. Statistics show that in other climes, loan to deposit ratio is above 100 per cent. For instance, in South Africa, it is 91 per cent, Kenya 76 per cent, India 75 per cent, Japan 70 per cent, Brazil, China and the USA, 70 per cent, 71.2 per cent and 75 per cent, respectively.
Therefore, if the banks must play their role of financial intermediaries that supply funds to both lenders and borrowers, it is appropriate that the CBN will continue to prescribe the ratios to give directions on the policy. To ensure that the policy is seamlessly implemented, the fiscal authorities should expand the revenue base of the economy and reduce the growth of public borrowing which now stands at over N24trn.
At the moment, commercial banks are facing difficulties in performing their traditional roles. This is understandable considering the enormous challenges most of the banks experience in balancing the diverse interests in the economy.
Now that the LDR is about to begin, there is need for effective monitoring of the directive and ensure adequate compliance.
We urge the banks to manage their risks of lending carefully. This has become expedient because poor loan quality is one of the reasons for rising bank failures and Non-performing loans put at over N1trn.
Therefore, the banks should be mindful of factors that have led to bank distress. These are disregard of banks policies, inattention to loan policies and lack of understanding of borrowers cash needs. The rest include poor systems for detecting loan problems and loan growth beyond the bank’s ability to control quality. To overcome these deficiencies, we advise that banks that have not developed a credit risk culture, supported by well-conceived management strategy, should do so before the September 30 deadline.
There is need to initiate good fiscal measures that will complement the monetary policy instruments by the CBN so that the new directive is carried out without any impediment.
While we await the appointment of new ministers, it is expected that the fiscal authority will provide the much-needed incentives that will support the CBN policy so that increased bank loans won’t lead to an increase in the Non-performing loans. The banks should realise that their success depends partly on their customers’ confidence.
It is high time Nigerian banks began to play among the big league of banks in the developed economies as regards loan to deposit ratio. Though the lending function is perhaps the most diverse and complex activity in banking, nonetheless, its effective organisation is vital to the profitability and solvency of any bank.