How real sector credit sustains upward trajectory with loans-deposit ratio policy

After five successive quarter-on-quarter contractions in GDP, Nigeria exited its last recession in the second quarter of 2017. Since then, the race has been on to ensure the economy goes at full throttle. Having recorded a Gross Domestic Product (GDP) growth rate of 0.8 per cent in 2017 (from -1.6% in 2016), 1.9% in 2018 […]

After five successive quarter-on-quarter contractions in GDP, Nigeria exited its last recession in the second quarter of 2017. Since then, the race has been on to ensure the economy goes at full throttle.

Having recorded a Gross Domestic Product (GDP) growth rate of 0.8 per cent in 2017 (from -1.6% in 2016), 1.9% in 2018 and  2.3% growth rate in 2019, the Nigerian economy seemed to be on the path of recovery and growth intended by the government’s Economic Recovery and Growth Plan (ERGP).

The thought in the minds of the nation’s economic handlers was for the growth rate to be ramped up with increased funding for the real sector since inadequate financing had been identified as a major constraint facing the real sector of the economy.

In 2018, the Central Bank of Nigeria (CBN) muted the policy on the upward review of the Loan-to-Deposit ratio (LDR) in a frantic bit to rapidly increase the credit given to the private sector as a way of stimulating growth and employment.

A circular by the Apex bank stated that all DMBs were required to maintain a minimum Loan to Deposit Ratio (LDR) of 60% by September 30, 2019 adding that the ratio shall be subject to quarterly review.
Hitherto, Banks maintained a loan to deposit ratio of not more than 80 per cent. CBN said the directive is to encourage SMEs, Retail, Mortgage and Consumer Lending.

The Apex bank stated that Failure to meet the minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall of the target LDR.
The CBN said it shall continue to review development in the market with a view to facilitating greater investment in the real sector of the Nigerian economy

Therefore in 2019, the CBN increased the LDR for Deposit Money Banks (DMBs) twice from 55% to 60%, and later to 65%.

By December 2019, several media reports revealed the CBN’s plans to increase the LDR to 70% in 2020.

This new policy which compels Banks to boost their credit to the real sector of the economy revealed that loans increased by N3.46 trillion in 2019 (between January and November, 2019).

The data which was obtained by Daily Trust indicates that the credit offered to the private sector rose by 15% (N3.47 trillion), from N22.94 trillion in January 2019 to N26.41 trillion as of November 2019.

At the end of November 2019, the total net domestic credit in the Nigerian economy rose from N28.65 trillion in January to N35.51 trillion. This means that the net domestic credit in the economy rose by N6.86 trillion or 23.9%.

With this performance, the apex bank continued the strict implementation of the policy in 2020 despite the slowing economic activities which saw a lull of about four months in the wake of the Coronavirus pandemic.

Speaking at a recent Monetary Policy Rate (MPR) meeting (MPR), the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele said:  “Aggregate domestic credit (net) grew by 5.16 per cent in June 2020 compared with 7.47 per cent in May 2020.

The Committee commended the CBN Loan-to-Deposit Ratio (LDR) initiative to address the credit conundrum as the total gross credit increased by N3.33 trillion from N15.56 trillion at end-May 2019 to N18.90 trillion at end-June 2020,” Mr. Emefiele had announced.

He said: “These credits were largely recorded in manufacturing, consumer credit, general commerce, and information and communication and agriculture, which are productive sectors of the economy.”

He said the money market rates remained relatively stable in the review period, reflecting the prevailing liquidity situation in the banking system.

The Committee was also excited about the decrease in Non-Performing Loans (NPLs) ratio to 6.4 per cent at end-June 2020 from 9.4 per cent in the corresponding period of 2019, on account of increased recoveries, write-offs and disposals.

The Committee expressed confidence in the stability of the banking system and urged the Bank to monitor the compliance of DMBs to its prudential and regulatory measures to sustain the soundness and safety of the banking industry.

The NPL figures has come with some delight because Analyst like the then head of  Research of FSDH had cautioned that Whilst the directive from the Central Bank of Nigeria could unlock  over N1.5trillion additional money to the real sector of the economy, it is also important to address those hindrances to lending in Nigeria, otherwise lending in the name of complying to meet regulatory requirement may lead to a rise in non-performing loans.

Speaking on the impact of the CBN intervention, Deputy Governor, Financial Systems Stability, Ahmad Aisha Ndanusa said: “The financial system has remained resilient albeit with regulatory support. Staff reports presented at the meeting show marked increase in the number of loans restructured; as at July 20, 2020, 22 banks submitted requests to restructure 35,639 loans of businesses impacted by the pandemic, representing 41.92 per cent of the total industry loan portfolio.

“This has partly reflected an improved industry risk profile, as the Non-Performing Loans ratio declined from 6.6 per cent in April 2020 to 6.4 per cent in June 2020. Net interest margin remains robust despite lower interest income, perhaps due to much lower industry interest expense, as market deposit rates continue to decline.

“ The Loan-to-Deposit Ratio (LDR), Global Standing Instruction, streamlining of access to Open Market Operations securities and other complementary measures have been strong tail winds which have strengthened intermediation – via increased lending to the key sectors such as manufacturing, agriculture and consumer markets (gross credit grew by an additional N300 billion from N18.6 trillion to N18.9 trillion between end-April and end-June 2020, respectively) and lower market lending rates, which have insulated the financial system from the worst impact of the pandemic.”

Also commenting on the intervention, the CBN Deputy Governor, Corporate Services Directorate, Adamu Edward Lametek said: “In fact, most analysts believe that the economy contracted in Q2 2020. There are, nevertheless, reasons to expect improvement in the second half of the year.

“First, as from July, we expect the impact of the economic stimulus by the Federal Government and the CBN to start showing – in fact, the Bank’s in-house business outlook survey has so suggested.

“Second, after hitting the floor during the lock-down, economic activity could pick-up much faster than currently estimated to compensate for losses in Q2, particularly as credit to the real sector continues to grow.

“Technically, the next 2 to 3 months should witness businesses racing to meet pent-up demand in many sectors of the economy. The third basis is seasonality – 13 Classified as Confidential the period, August – October, traditionally witnesses substantial harvest of farm produce, which comes with increase in commerce and related activities,” he explained.

Lametek further stated that it is gratifying to note that the economy has received and continues to receive substantially higher amounts of credit compared with periods of similar crisis in the past.

He said: “Between June 2019 and June 2020, total credit rose by N3.46 trillion (about 22 per cent), of which new credit in June 2020 alone accounted for N773 billion, up from N412.7 billion in May 2020. The number of new credits (recipients) similarly rose by about 42,000 to 93,578 from 51,700 in May.

“The huge credit output in the economy was underpinned by improved resilience of the banking system. As at end-Q2, most financial soundness indicators (FSIs) performed well relative to regulatory benchmarks.

“In spite of macroeconomic challenges, banking industry tier one capital accounted for 87.22 per cent of the total qualifying capital at end-June 2020; capital adequacy ratio (CAR) stood at 14.96 per cent with non-performing loans (NPLs) ratio of 6.4 per cent and provision ratio of 118.9 per cent,” he noted.

Fines for Non Compliance

The CBN debited banks of Cash Reserve Ratio (CRR) worth N926.4 billion for breach of its lending policy.

The banks affected in the CRR deduction include Zenith Bank Plc (N290bn), UBA (N160b), Access Plc (N140bn), FBN (N95bn), GTB (N55bn), Polaris (N30bn), Keystone (N30bn), Standard Chartered Bank (N24bn), Fidelity (N15bn), FCMB (N11bn), Ecobank (N11bn), Stanbic (N10bn), WEMA (N10bn), Coronation (N3.9bn), Sterling (N8bn), Citi (N6bn), Union (N5bn), Providus (N5bn), RMB (N5bn), FSDH (N1.5bn), NOVA (N1bn) Globus (N3bn) and Unity (N7bn).

With these deductions, the Apex bank has debited a total of N1.4 trillion from the banks in one month. On October 9, 2020, the regulator debited banks of CRR worth N462.7 billion for breach of its lending policy.

“We give them incentives that when they lend to the Small and Medium Enterprises (SMES), and private sectors, they will be granted certain dispensations to make them happy while failure to comply will result in taking 50 per cent of the un-lent portion of their loans into the CRR. What the deduction means for the sector is that it puts pressure on the Net Interest Margin of the banks as these funds earn zero interest with the CBN.

“This is responsible for the low deposit rates in the banks as banks may be wary of taking deposits. On the positive side, the economist said the low interest rate has shifted investors’ focus to other asset classes with higher yield which aligned with the CBN’s position”, the CBN governor, Emefiele explained.

In July 2019, the CBN wielded the first big stick on 12 banks for LDR default to demonstrate its determination to jumpstart the economy.

The regulator deducted N500 billion from the accounts of 12 banks for failing to meet the target to provide credit to their customers.