Recently, the Central Bank of Nigeria (CBN) has introduced guidelines aimed at forcing banks to revert to their traditional role of lending.
The lender of last resort had issued guidelines that mandated banks to maintain a minimum Loans to Deposit Ratio (LDR) of 65 percent by December 31 2019 and 150n percent weighting to be applied to loans to SME, retail, consumer and mortgage sectors for the purpose of LDR computation.
Interestingly, Nigerian banks have the lowest LDR when compared to their peers in Africa, Emerging and Frontier Market countries.
For instance, Guaranty Trust Bank (GTBank) Plc, Zenith Bank, Access Bank, FirstBank Holdings, and United Bank for Africa (UBA) have LDR of 54 percent, 55.80 percent, 67.40 percent, 54.20 percent, and 62.10 percent as at September 2019.
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That compares with the LDR of absa Bank of South Africa, (103.80 percent); Sber Bank of Russia, (92.40 percent); CIM Bank of Malaysia (87.10 percent); Gulf Bank of Kuwait, (82.50 percent); Affin Bank of Brazil 77.60 percent); State of India of India (75.90 percent); Scamcon Bank of Vietnam, (74.70 percent); Bank Aljazera of Saudi Arabia, (71.90 percent), and ICB of (China 66.40 percent).
Analysts are of the view that Nigerian lenders are cautious of extending credit from to high risk sectors as they are recovering from the shock of the precipitous drop in crude oil price that resulted in huge write-offs.
Wale Okunrinboye, Investment Analyst at Sigma Pensions Limited said these countries did not go through the oil predicament that stoked the Non Performing Loans (NPLs) of oil producing Nations and that LDR for Nigerian banks were high in pre crises period (2014).
“A lot of issues came up in 2018. For instance the introduction of the International Reporting Standard (IFRS) 9 changed the computation o fundamental ratios,” said we are just coming out of a cycle”
The Central Bank of Nigeria (CBN) had issued guidelines that mandated banks to maintain a minimum LDR of 65 percent by December 31 2019 and 150n percent weighting to be applied to loans to SME, retail, consumer and mortgage sectors for the purpose of LDR computation.
Measures to bolster credit are part of President Muhammadu Buhari’s plans to revive an economy that is growing sluggishly.
Cordros Capital Limited estimated that banks would need to create an aggregate of N2.11 trillion to meet the new floor, as they expect more penalties from regulators.
Nigerian banks had lost some of their appetite to extend credit after the sudden crash the crude oil price of mid 2014 resulted huge bad loans and deteriorating asset quality, but they are now tapping into retail and consumer space of the market amid stringent regulations.
Additionally, firms had been packing their money in short term government securities when yields were high, while they continue to deliver a higher return for shareholders in form of bumper dividend payment.
“We see this as headroom for increased extension of credit in Nigeria on stronger macro improvement,” said analysts at Chapel Hill Denham Limited.
“In line with our macro outlook, we believe fiscal and structural reforms will be likely to foster economic expansion,” said analysts at Chapel Hill Denham.
Analysts say the short notice given to banks to comply with rule, as well as desperations to avert sanctions, probably lead some of them to trim the interest rate they charge on loans.
Over the last few days, companies have continued to lower their lending and deposit rates as they struggle to meet the deadline, as the regulator had in a recent circular banned individuals and local firms from investing in both its primary and secondary Open Market Operations (OMO) auctions.
The average monthly deposit rates for banks which were about 4 percent last week Monday has been further reviewed by banks to about 3 percent as at Friday.
Analysts say CBN’s minimum LDR policy also means that banks are not enthusiastic about sourcing deposits, resulting in a significant decline in deposit rates.
Analysts at Chapel Hill Denham Limited said some lenders were banks are accepting deposits at about 2 percent compared to c.10 percent previously
They added that the new rules restricting individuals, Pension Fund Administrators PFAs and corporates to Nigerian Treasury Bills (NTbills), fixed deposits and FGN bonds have resulted in increased demand for NTbills, forcing down rates.
