Godwin Emefiele, CBN Governor
  • Directive is an interference with free-market —Expert

By JULIUS ALAGBE

There is fresh anxiety in the financial sector of another banking crisis that may arise from toxic loans as a result of the recent directive by the Central Bank of Nigeria, CBN, on deposit-loan ratio. The recent directive issued by the apex bank requires banks to maintain book loans in relation to a fixed percent of deposits.

However, some banking sector experts have said that the CBN directive is a direct interference with free market and may trigger another crisis in the sector, as banks are still grappling with huge non performing loans, NPL. Government had vowed that AMCON, the SPV for bad loans would undertake such responsibility again as it is yet to dispose of its liabilities which stand at over N5 trillion.

They noted that the rush to force deposits money banks to book more loans in the real sector would result to further increase in the banking sector non-performing loans. Analysts asked government to set economic agenda that will increase growth rate and broad based performances rather than it selective sectoral targeting. Banks are now required to keep a 60 percent loan of the deposits.

In a bid to reflate the economy with improve access to credits; the central bank seems to be overshooting its gun, analysts said. According to some Broad Street analysts, they reckoned that the direction is an assault on free-market risk taking decision. Some analysts said though there is need to lend to real sector of the economy but it is not CBN place to tell how deposits should be allocated to various assets classes.

With this, and the tool the apex bank intends to use to enforce the directive, the CBN may be acting as Managing Director in principle for all the banks.

“There is standard policy on cash reserve ratio, it should not be modified to satisfy other objectives other than the reason it was formulated”, Kingsley Ezoh, a senior consultant with LSintelligence said.

Ezoh added that, “The CBN can create special vehicles where target sectors can access funds at a cheaper rate to satisfy its urge or economic growth policy. Look at commercial paper, there are certain companies that have stopped patronizing overdraft or short term loans from commercial banks. They are going for commercial papers and even banks are raising funds with it”.

It would be recalled that the CBN Governor, Mr. Godwin Emefiele, last month unveiled his vision for the industry to kick start his second term. He had said:

“Beyond our intervention programs, we are also working to encourage banks and financial institutions to lend from their balance sheet in order to support the growth of critical sectors of the economy, such as Agriculture, MSMEs and the Real Estate Sector. Greater emphasis on improving consumer spending and business investment by MSMEs is critical to sustainable double digit growth of the Nigerian economy”.

On CBN interference in the free market, Afrinvest said in a note that, “Our concerns are that the inconsistency of monetary policy targets, continued financing of the Federal government and the apex bank’s perceived lack of independence may affect its objectivity. Similarly, we worry about the bank’s expanding development financing agenda rather than a focus on price stability”.

After his second term confirmation, Godwin Emefiele led CBN had come out with number of plans, proposals and circulars including 5-years plans.  Of particular interest is the use of carrot and stick method to control how banks manage their operations. The apex bank had in many occasions berated banks for refusal to lend to the real sector of the economy.

Also there is the proposed policy of another banking recapitalistion, which the Governor said has become inevitable to restore the value of banks’ capital in view of the devaluation of the naira. The bank had argued that there was need to grow the banks to perform their statutory function of funding the economy especially the real sector so as to create jobs and improve growth. The result of lack of banks’ support is that the economy has consistently achieved low growth due to weak private investment.

Banks’ desire for booking lower impairment charges would seems to be short-lived with the directive. The apex bank circular now asked DMBs to maintain a Loan to Deposit Ratio (LDR) of 60% by September 30, 2019.

The CBN further stated that failure to meet the regulatory requirement by the stated date would result in charge of an additional Cash Reserve Requirement (CRR) equal to 50% of the lending shortfall of the target LDR.

Ezoh said that what CBN is trying to do is to refocus banks operations.  What we know banks for is to collect deposits and offer loans. But that has stopped for long. Banks have been programmed lately to say no to loan applications and they have best bet in the fixed income market.

“But, moral suasion is the best way to achieve this. Though, CBN has said on several occasions that banks are frustrating efforts to creating credits in the real sector as it had used moral suasion. Whatever the case may be, the directive is direct interference with free-market system”, Ezoh added.

To achieve CBN demand, some banks may have to lower risk criteria when they are assessing credit application in order to meet the CBN directive, industry experts unanimously said at MarketForces forum. They said that this would result to increase in non-performing loans in the industry which may again endanger the industry.

It would be recalled that the industry’s NPL rested at 10.83% at the end of first quarter 2019. The point marked the lowest attained in the last 5 quarters, at least. In the last three years, banks have strived to achieve cleaner balance sheet, having carried heavy log of toxic assets since 2016. The apex bank had set 60% loans to deposits ratio benchmark, and cash reserve ratio has been at 22.5%.

Banks have been in bearish mood on booking more loans since 2016 when the recession hit. Also, the CBN had expressed worry over rising case of loan default which led to expanded non-performing loans in the sector.  The sector NPL was at about 15%, as banks toxic assets jerked up. Due to need to clean up balance sheet, banks increased investment in the fixed income market to replace booking loans.

At the time treasury bills yield rates was as high as 16%, before government securities started moderating.

Tellimer, a London headquartered developing market financial institution, said that this directive may pose asset quality risks to the sector, as banks may have to lower risk criteria to achieve the CBN’s threshold.

Tier 1 banks were not practically lending, given their positive cash position; they were able to closed earnings gap with yield from fixed interest rate market. Many of them ramped up deposits from customers but failed to lend to real sector.

Thereby, total productive money in circulation reduced and productivity receded, and among other factors, resulted to increase in unemployment rate. In the third quarter of 2018, unemployment rate hit all time high at 23.1%.

Against general expectations that lending would resume, the first quarter results showed otherwise. Few banks really did lend to their customers. Notably exception is Fidelity Bank Plc which offered 95% of its total credits as loans.

Tellimer said, “We could see an outcome where banks choose a much higher CRR over rushing to achieve the loan/deposit threshold, to manage asset quality headwinds. Bearing in mind that the CRR peaked at 50-60% for some well-capitalised banks (according to IMF Article IV, April 2019), there is bound to be pressure on margins and profitability due to this.

“We could also see banks showing less interest in taking deposits, in order to limit the loan growth required to meet the new loan/deposit threshold”, Tellimer stated.

The CBN’s directive favours SME, retail and mortgage loans, which would have a 150% weighting in computing the regulatory loan/deposit ratio.

“This segment has been an area of recent focus, and has been identified as a growth area by many banks in FY19. This would ideally raise the ‘regulatory’ loan/deposit ratio close to the benchmark and could help banks catch up a bit more easily, although the CBN maintains the right to define what constitutes such loans”, Tellimer stated

At the end of first quarter, Access Bank recorded loan to deposits ratio of 66%, FBNH 48% and FCMB 74%. GTB 53%, Stanbic 56% and UBA 48%  and Zenith did 50%.

The penalty for not meeting the threshold by the set deadline is an additional CRR levy equal to 50% of the lending shortfall of the target threshold, which would be likely to restrict banks’ ability to invest in government treasuries.