BY EMEKA EJERE

Concerted efforts by the deposit money banks (DMBs) to escape the sledge hammer of the Central Bank of Nigeria (CBN) over the 65 per cent loan deposit ratio (LDR) is beginning to inject life into the real sector of the economy through credit availability.

With the CBN policy of increased lending to the real sector of the economy gradually putting an end to the sector’s hitherto regular complaint of lack of access to funds from the banks, a surge in the sector’s contribution to the gross domestic product (GDP) is expected. In the last quarter figure recently released by the National Bureau of Statistics, NBS, the sector’s contribution to the GDP dropped.

The apex bank had in July, directed commercial banks to maintain a minimum LDR of 60 per cent effective from September 30, 2019. However, by the end of September, the stipulated minimum level was raised to 65 per cent, with a fresh deadline of December 31, 2019.

The banking sector regulator had debited 12 banks that failed to meet the September deadline a total of N499 billion which is an aggregate of additional cash reserve requirement (CRR) equal to 50 per cent of their lending shortfall. Those that do not meet this new deadline would also not go unpunished.

The CBN had said in a letter to the banks on the lending policy, stressed that the LDR would be subject to quarterly review.

“To encourage SMEs, retail, mortgage and consumer lending, these sectors shall be assigned a weight of 150 per cent in computing the LDR for this purpose. The CBN shall provide a framework for classification of enterprises/businesses that fall under these categories.

“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. The CBN shall continue to review development in the market with a view to facilitating greater investment in the real sector of the Nigerian economy,” it had stated in a circular.

Little wonder the Small and Medium Enterprises, SMEs, sector has emerged as the beautiful bride of deposit money banks in the country as they jostle to find niches to meet the new CBN, policy of increased lending to the real sector of the economy. At stake is the sum of about N1.5 trillion which the banking sector is expected to disburse to comply with the regulation.

Interestingly, the CBN has also hinted of plan to further raise the minimum LDR level to 70 per cent by the end of 2020.The central bank policy has since unlocked over N1.5 trillion consumer and real sector lending to the economy.

CBN Governor, Mr. Godwin Emefiele, said the credit conditions in the banking system have since improved due to the policy. According to him, banks in the country are now able to recover delinquent loans from customers’ accounts in other banks. Emefiele said the measures had placed Nigerian banks in a much better position towards supporting a stronger economic recovery.

Consumer lending stimulant

Speaking recently on the effect of the LDR so far, the managing director, Guaranty Trust Bank Plc, Mr. Segun Agbaje, explained that the banks were on the verge of meeting the 65 per cent minimum loan to deposit ratio target set by the CBN at the end of the first quarter. Agbaje said the policy led to a massive boost in retail customers for banks and enhanced credit to individuals and companies.

“What is needed to stimulate any economy is lending and credit and so when the LDR was first fixed at 60 per cent we thought it was monumental; but as you can see, it is 65 per cent. I think this is very critical not only to the banking industry, but to Nigerians as a whole.

“From our perspective, this has been one of the most successful things that was done in 2019 when you look at how much credit that was availed in six-month period.

“Consumer credit has grown very well. The corporates who have always had credit have also been availed more credit and for any economy to grow the SMEs and retail segment must be availed with credit and I think the LDR is doing that very well.

“I think most banks are closed to 60 per cent which as the director said, we will push to try to get ourselves the remainder of the five per cent between now and the end of first quarter and maybe latest, by half year.

When asked to be specific about the figures, Mr. Agbaje explained;

“We are all just finishing our results for the year end so I don’t have the December 31 figures. But from what I have seen so far today, consumer credit or what we would call retail is about 10 per cent of bank books.

“If you were to take GTBank, our consumer lending is around N150 billion today. I am expecting that you see the year-end figures, you should see retail and consumer credit is about 10 per cent of the loan portfolio of banks since the LDR was introduced.”

The director general, Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, had noted that the new lending policy was a timely corrective measure to improve credit to the private sector, which had for years grappled with issues of credit access, cost of credit and tenure of funds.

He said: “The economy was characterised by profound crowding out effect of the private sector in the financial markets owing to the diversion of credit to government through the instrumentalities of treasury bills and Federal Government bonds.”

The LCCI boss expressed optimism that the lending policy would impact the economy through quality financial intermediation while bridging the funding gaps in many sectors. He said it would improve economic inclusion of more SMEs and promote economic diversification in line with the Economic Recovery and Growth Plan (ERGP).

Yusuf noted that the policy had the probability of reducing interest rate as supply of credit would increase and improve lending creativity and innovation by banks.

“This will result into a broader and more diversified sectoral coverage of lending,” he said.

 

Managing the risk

The International Monetary Fund (IMF) had warned that the new regulations to spur lending, should be carefully assessed and may need to be revisited in view of the potential unintended consequences on banks’ asset quality, maturity structure, prudential buffers and the inflation target.

Yusuf had, however, noted that the bigger challenge for businesses in the country has to do more with the operating environment.

“Firstly, many of the SMEs are not prepared. For them, they think you just walk up to the bank and collect the money, which is a major bottleneck. Then, the risk environment, which is not in the hands of the banks, is also a problem.

“If businesses are operating in an environment where there are too many challenges, it will be difficult for them to operate profitably and that affects the capacity to repay their loans,” he explained.

He cautioned that the banks would also need to be creative in how they access the SMEs.

“We should also have a good data bank for the profiling of SMEs and they should make better use of the credit bureau; they should be able to take more risks and not just to sit in the comfort zone of not wanting to take any risk at all.”

He submitted that credit guarantee framework should be strengthened to give comfort to the banks and also promotion of the use of credit insurance. Yusuf urged the fiscal authorities to effectively address enabling business environment issues, particularly infrastructure deficit and quality, in order to reduce credit risk.

But the CBN is confident that the aggressive drive to increase lending to the private sector will not result in a gradual accumulation of non-performing loans (NPLs) in the sector.

The director, Corporate Communications, CBN, Mr. Isaac Okoroafor, pointed out that with the lending clause introduced recently by the Bankers’ Committee, it would be difficult for habitual loan defaulters to operate in the sector. With the clause, a lender would be able to recover its loan from the assets of a defaulter domiciled in another bank.

Okoroafor explained: “First of all, it is important for us to come to the realisation that the primary responsibility of banks is to act as catalysts by being intermediary between the surplus sector and the deficit sector.”

According to him, a review of banking sector loan portfolio in Nigeria by the Monetary Policy Committee (MPC) showed that in the last one year, credit to the private sector has been flat.

“What the MPC found out was that banking industry loan has been at best flat and in most cases, dropped. And the central bank felt that to encourage the banks, we need to be aggressive by prescribing for them what the minimum LDR should be.

“Yes, we have heard in some quarters that it will push up NPLs. That is not true. It is not true because we have put in a rule whereby those who have access to credit are people who genuinely do require those loans.

“In this case, we have introduced a clause, which we have mandated all banks to put in the offer letters to their customers. The clause states that by accepting the offer or by drawing the loan from a bank that I commit that I would pay back the loan.

“And if for any reason I don’t pay back the loan or abandon it and go to another bank to open an account, the central bank has the right to go to the new bank I opened account, take the customer’s money and pay off the loan,” he said

He added that what that meant was that the possibility of somebody either arguing with his bank or going to court would not arise.