By AZUBIKE NNADOZIE
The recent circular by the Central Bank of Nigeria mandating commercial banks operating in the country to give out up to 60 per cent of their customer deposits as loans to the real sector appears to have set the banks on edge.
The Governor of the CBN, Mr. Godwin Emefiele, had informed attendees at the 2019 Africa Investors’ Conference, which took place in London between June 25 and 27, of his plan to issue the regulation.
In what some analysts have described as military-style fiat, the CBN ordered all deposit money banks to maintain a minimum loan to deposit ratio of 60 per cent by Monday, 30th September 2019, adding that the ratio would be reviewed quarterly.
Following the new policy, which it claimed was aimed at correcting market anomalies to ensure economic growth, fears are being expressed in the nation’s banking sector that is currently being weighed down by the heavy burdens of bad as well as non-performing loans, that the new policy would worsen their dilemma and expose them to higher loan losses, which would negatively impact on their profitability.
Statistics from the National Bureau of Statistics had put the value of the stock of non-performing loans of Nigerian banks at about N1.69 trillion (N2.19 trillion as at April 2018).
HOW IT WORKS
Market analysts explained that if bank ABC with the licence it got from the CBN has a deposit of N1 trillion, for instance, for security reasons it is expected to keep N225bn with the CBN as Cash Reserve Ratio. In line with the new policy, it is also expected to lend out N600bn of the remaining N775bn to the real sector.
If bank ABC, for instance, had only lent out N400bn, and kept N375bn in T-bills, the CBN’s directive states that it has an LDR shortfall of N200bn, that is, (600bn target-400bn actual). At this point, the apex bank won’t force it to increase its lending; the CBN will only take 50 per cent of that N200bn shortfall off bank ABC’s books as additional CRR, taking its CRR to N325bn, for it to have just a Maximum of N275bn (as against the old N375bn) to now stash in T-bills. So, ABC’s new CRR effectively becomes 32.5 per cent and not 50 per cent.
FIRST POSSIBLE CASUALTIES
Just last week, indications emerged that for recording shortfalls in their 2019 Q1 financial reports, the Central Bank of Nigeria may sanction no fewer than seven top Nigerian banks in September, if they fail to comply with its new lending policy.
The banks that may incur the wrath of the apex bank include Guaranty Trust Bank, Zenith Bank, First Bank of Nigeria, Ecobank Transnational Incorporated, Stanbic IBTC Holdings, Union Bank of Nigeria Plc, and United Bank for Africa Plc.
According to analysts, the financial reports of the affected banks for 2019 Q1 showed that they recorded 51.6 per cent Loan to Deposit Ratio, which represents 8.4 per cent shortfall of the LDR target.
The banks’ deposits also stood at N20.12 trillion during the period under review, as they disbursed N10.4 trillion loans to their customers. Under the new policy, they would be required to disburse N12.1 trillion loans.
Going by the letters of the new policy, which will be implemented in about two months, they stated that the seven banks would have no choice than to increase their loan positioning with as much as N1.7 trillion, which represents the LDR shortfall recorded as at end of March 2019.
“Should they fail to create a window for the outflow of the credit facilities as at the given period, the CBN may enforce a sanction of locking up half of the amount, which is about N844 billion,” they explained.
Before now, the apex bank had stated that its directive s to the DMBs to lend out a minimum of 60 per cent of their deposits to the real sector would take effect from Monday, September 30, 2019.
LDR is an instrument deployed to assess a bank’s liquidity by comparing its total loans to its total deposits for the same period. In this process, if the ration appears too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements, especially if the loan repayments fall short of schedule. Conversely, if the ratio is too low, the bank may not be earning as much as it can from the deposits it had taken at a cost.
In his reaction to the new CBN policy, Group MD/CEO of Lagos based Cowry Asset Management Limited, Mr. Johnson Chukwu, told our correspondent that the policy, if well implemented, could create a channel through which more credit could be channelled to the private sector.
According to him, the policy could compel banks to give loans to sub-prime creditors. He warned on the possible dangers of forcing banks to give out more loans, adding that if the banks were compelled to give out loans to subprime borrowers, it could lead to aggravation of the already bad incidence of non-performing loans in the banks.
The banks, he said would also have to make this adjustment within a period that is less than two months and this would increase the volume of work that they have to do.
He stated that there was a need to moderate the target for the banks or extend the timeline, otherwise, the sector would see banks booking a lot of credit that might not be recovered because the high cost of credit is one of the contributing factors to credit default.
According to the Cowry Asset Management boss, Nigerian banks are used to giving out short term credit facilities and to play safe would rather have their money in the cash reserve and take their time to look for creditworthy customers to lend to.
“If we can avoid the risk of loan failure, we should see an enhanced level of economic activity, a high level of productivity as a result of credit availability, he stated, adding, “Availability of credit facilities will stimulate economic activity; lead to job creation and a positive impact on the GDP.”
Renowned economist and Managing Director of Cocosheen Nigeria Limited, Lagos, Mr Henry Boyo, who commended the new policy, said that no economy grows without the support of the banks. According to him, the government and the CBN have always been the major beneficiaries of loans from the banks at low interest rates, while the productive sector is often denied of cheap loans.
On the threat of sanctions against banks that failed to meet up with the September 30 deadline, Boyo wondered why the apex bank would be talking about punishing the banks. He said that what the CBN should rather do was to put in place a form of insurance for such loans that would cushion the negative impacts of long tenured facilities on the operations of the banks.
However, while the banks are currently gripping with how to jump the latest CBN huddle, real sector operators are happy that their desire for adequate funding is finally here.
The apex bank had explained that the loans were meant to encourage SMEs, retail, mortgage and consumer lending, adding that “these sectors shall be assigned a weight of 150 per cent in computing the LDR for this purpose, and the CBN shall provide a framework for classification of enterprises/businesses that fall under these categories.”
According to Mr. Osunde Jubril, a Mushin Lagos based plastics manufacturer, this is really a welcome development if you ask me. We’re looking for about N500 million that would enable us to buy new equipment and expand our business, and I am happy that it is now within reach.”
He, however, expressed the fear that with so much of their funds going into real sector as loans, the banks might plough back some of the money they intended to declare as dividends to shareholders, something he had been looking forward to.
