Lending: Banks race to beat CBN’s deadline

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by Collins Nweze

BANKS are in a race to beat the September 30 deadline given by Central Bank of Nigeria (CBN) to implement the 60 per cent minimum Loan to Deposit Ratio (LDR) policy.

They are scrambling for credible borrowers, The Nation learnt on Thursday.

The apex bank had mandated banks to give out 60 per cent of their deposits as loans. The regulator said banks that did not comply with the directive would have their Cash Reserve Ratios (CRR) increased. Cash reserve ratio is the share of customers’ deposits kept with the CBN.

To ensure compliance as the timeline nears, Tier-1 banks, lenders with assets greater than or equal to N1 trillion, are luring credible borrowers in Tier-2 banks with mouth-watering interest rates.

The industry average lending rate is around 23 to 26 per cent per annum, but premium borrowers still get credit at 16 to 17 per cent per annum.

Confirming the development during the presentation of banking sector report in Lagos, Senior Analyst, Banking & Insurance Department at Agusto & Co, Mrs. Ada Ufomadu, said Tier-1 banks are now going for big and credible borrowers in Tier-2 banks, offering them reduced lending rates for new loan plan.

FirstBank, Access Bank, Zenith Bank, United Bank for Africa and GTBank fall within the Tier-1 bank category.

According to Ufomadu, the focus of the LDR minimum is to promote consumer and mortgage credit to drive demand.

She said: “Most Tier 2 banks comply with the new LDR minimum requirement, but not all Tier- 1 banks have complied with the CBN policy and short timeline for the policy implementation remains a challenge.”

Mrs. Ufomadu said the industry LDR stood at 80.1 per cent in 2016; 75.1 per cent in 2017 and 66.4 per cent in 2018 and has continued to trend southwards as lenders cut their credit exposures, focusing on high-yielding government securities- Bonds and Treasury Bills.

She said the industry’s total assets stood at N25.49 trillion in 2014; N25.7 trillion in 2015; N28.02 trillion in 20116; N30.82 trillion 2017 and N33.3 trillion 2018. These statistics, she added, should ordinarily provide good opportunity for banks to lend to to the real sector.

Mrs. Ufomadu said the banks are at present, engaging in ‘cautious growth’ lending on government securities.

According to her: “The top five banks have 57 per cent combined industry assets and 59 per cent loan book, adding that there is steady decline in industry assets.

“Tier-1 banks lost N1.1 trillion to the implementation of the International Financial Reporting Standards 9 (IFRS 9) implementation, which helps lenders to be more stringent in classifying their loans.

“In the last three to four years, banks have not been bullish in lending. Even the CBN regulation cannot change that reality. Banks are also rejecting expensive deposits and going for low interest deposits.”

Speaking on the LDR policy, Head, Currencies Market at Ecobank Nigeria, Olakunle Ezun, said the policy would stimulate lending to Small and Medium Enterprises (SME), retail, mortgage and consumer lending.

He explained that the mandate to banks is to maintain a minimum LDR of 60 per cent (compared to current industry average Loan to Deposit Ratio (LDR) of 58.5 per cent as at May 2019 and regulatory maximum of 80 per cent), subject to quarterly review.

By this regulation, the CBN aims to improve market liquidity and, subsequently, encourage deposit money banks to increase lending to the productive sector of the economy. This comes with additional incentive of a weight of 150 per cent to the preferred sectors in the computation of LDR.

”The CBN’s recent move could be positive, as we expect improved lending to the productive sectors of the economy,” Ezun said.