CBN’s LDR policy buoys lending to real sector


The Central Bank of Nigeria’s Loan to-Deposit-Ratio (LDR) initiative has through its 18 months of existence, largely accomplished its objective of driving the needed credit to the real and other critical sectors of the economy, reports Group Business Editor, SIMEON EBULU.

Although the Loan-to-Deposit Ratio (LDR) is a common lexicon in banking, its discourse came to the fore about a year and a half ago when the leadership of the Central Bank of Nigeria (CBN) made it an issue to impress it on banks to redirect credit to the real sector.

Manufacturers, agribusinesses, Small and Medium Enterprises (MSMEs) and businesses generally have been complaining that Nigerian banks, despite their being awash with huge depositors funds and huge lodgements by telcos and others from retail stores and supermarkets, including deposits from the hospitality, leisure and entertainment sectors, have been frugal and inconsiderate in advancing credit to businesses for growth.

Its been argued, as Godwin Emefiele, CBN Governor admitted, and many others before him, that banks have virtually abandoned their core business of lending to finance production and manufacturing, to becoming mere traders and buying governments’ commercial instruments to the detriment of playing their larger role of business financiers, essentially to avoid being caught up in any perceived or potential future risks.  Left alone, the Deposit Money Banks (DMBs) would rather use the huge cheap funds at their disposal (for which they pay pittance, or next to nothing as interest to depositors) to just be trading back and forth on government securities with guaranteed near eternal returns, or profits.

Emefiele aptly captured the essence of the introduction and enforcement of the LDR in the nation’s banking space, when he accused the banks of shying away from extending credit to the real sector in preference for investment in safe governments’ commercial papers. He blamed the inability of banks to lend to the private sector on the latter’s choice of investing in risk-free securities rather than lending to the real sector of the economy.

His opinion is equally shared by the Organised Private Sector (OPS). Small businesses, traders, property developers, and others have been crying and pleading with the banks to open their vaults to advance them succour in cash to both run and grow their enterprises. If and when they are heard and attended to, the securities, collaterals and terms of engagement demanded by the banks, more often than not, act as a scare rather than an inducement to take any facility, or loan.

The Director- General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, is on record as saying  that the greatest challenge business operators in the country have been facing over the years was access to credit, which he said had resulted to huge financing gaps.

But it has always been argued and rightly so, that banks are the agents of growth to the real sector. If this is true in other climes, why should it be so different in Nigeria?

Admittedly, the  business environment in the country has its peculiarities. Nonetheless, the same environment has been extremely kind to the industry, to the extent that the banking industry is among the sectors that churn out an enviable level of profit year in, year out.

LDR delicate balance

LDR is an indicator of a bank’s ability to cover loan losses and withdrawals by its customers. Investors monitor the LDR of banks to make sure there’s adequate liquidity to cover loans in the event of an economic downturn which could result in loan defaults.

Also,  LDR helps to show how well a bank is attracting and retaining customers. If a bank’s deposits are increasing, it’s an indication that new money and new clients are coming on-board either way, the bank will likely have more money to lend, which should increase earnings.

Although it’s counterintuitive, loans are an asset for a bank since banks earn interest income from lending. Deposits, on the other hand, are liabilities because banks must pay an interest rate on those deposits, albeit at a low rate.

LDR can help investors determine if a bank is being managed properly. If the bank isn’t increasing its deposits or its deposits are shrinking, the bank will have less money to lend. In some cases, banks will borrow money to satisfy its loan demand in an attempt to boost interest income.

However, if a bank is using debt to finance its lending operations instead of deposits, the bank will have debt servicing costs since it will need to pay interest on the debt. As a result, a bank that borrows money to lend to its customers will typically have lower profit margins and more debt. A bank would rather use deposits to lend since the interest rates paid to depositors are far lower than the rates it would be charged for borrowing money.

LDR helps investors spot the banks that have enough deposits on hand to lend and won’t need to resort to increasing their debt.  LDR is a proper delicate balance for banks. If banks lend too much of their deposits, they might over-reach themselves, particularly during an economic downturn. However, if banks lend too little of their deposits, they might have opportunity cost since their deposits would be sitting on their balance sheets earning no revenue. Banks with low LDRs might have lower interest income resulting in lower earnings.

On the balance, the state of an economy plays a key role on how banks tinkle with the LDR. In a relatively buoyant economy where rate of employment is high and income and savings are assured, a high LDR would be advised, but not so if the reverse is the case because the sources of income and savings would have been substantially eroded, or grossly minimised.

CBN’s 65% LDR

There were misconceptions initially when the CBN first rolled out the 60 per cent benchmark LDR for the banking sector in June last year, which it later raised to  65 per cent three months later. The thinking was that compelling the banks to lend that much level of depositors funds to the real sector and others could result in increased Non-Performing Loans (NPLs), given the existing and obvious challenges facing the real sector, compounded by inadequate and failing infrastructure, foreign exchange challenges and growing insecurity everywhere across the nation. Coupled with that, was the apathy and the mindset of many borrowers, who say the prevailing high interest rates do not offer, or present any incentives to loan takers even if the funds were to be readily made available.

Added to that was the argument that the prevailing environmental setting was frustrating production and manufacturing and that only commercially oriented businesses, such as importation and trading,  seemed to be the toast and the way to go, and that banks were themselves directly playing in those fields, or have recruited collaborators and surrogates thereby subjecting others to stiff competition.

Initial resistance

The attitude, or rather disposition of the banks, at least a sizeable number of them to the policy, clearly proved their unpreparedness to comply with the policy. It took the regulator’s doggedness and unwavering position to rein the sector  to comply. At the first count, about 12 leaders, of the nation’s 25 banks were in non-compliance mode. For this affront, the CBN wheeled the big stick forcing them into compliance by imposing strict penalties.  The following banks, at the onset  couldn’t maintain the LDR and their accounts were deducted resulting in the corresponding raise of their CRRs as follows; Citibank (N100,743,055, 321); First Bank of Nigeria (N74,668,880,480); FBNQuest Merchant Bank (N2, 697,456,144); First City Monument Bank (FCMB) (N14, 371,064, 742); Guaranty Trust Bank (GTBank) (N25, 147, 933, 628); Jaiz Bank (N7, 525, 165,552); Keystone Bank (N4, 162, 938, 879); Rand Merchant Bank (N2, 823,177,399); Standard Chartered Bank (N30,027,137,984); SunTrust Bank (N1,703,205,427); United Bank for Africa (UBA) (N99,676,181,916) and Zenith Bank (N135,629,337,625).

This singular penalty by the CBN, cleaned out N499.9 billion off the banks deposit with the regulator thereby making those funds idle with the implication that no profit could be derived, nor investments made with the cash. Although the banks’ compliance with the LDR margin have since caused the CBN to restore the funds to the banks, the CBN has warned that the exercise will be a continuous one.

The LDR measure, a Bloomberg report indicated, was among a raft of regulations aimed at forcing banks to boost credit, mainly to farmers, small-and-medium-size businesses and consumers.

The LDR is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period. The LDR is expressed as a percentage. If the ratio is too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements. Conversely, if the ratio is too low, the bank may not be earning as much as it could be earning. According to a report, Nigerian banks are some of the most reluctant lenders in major emerging markets, with an average loan-to-deposit ratio below 60 per cent. That compares with 78 per cent across Africa, according to data compiled by Bloomberg, with 90 per cent in South Africa and about 76 per cent in Kenya. Compare this with developed markets such as the UK, which according to, states that Shawbrook Bank’s loan to deposits ratio on the British market between 2012 and 2016 increased from 74 per cent in 2012 to 102.7 per cent as of 2016.

Typically, the ideal loan-to-deposit ratio is 80 per cent to 90 per cent. A loan-to-deposit ratio of 100 per cent means a bank loaned one naira, or dollar (as the case may be) to customers for every naira, or dollar in deposits it received. It also means a bank will not have significant reserves available for expected or unexpected contingencies.

 Gains of LDR

Banks’ credit to the private sector from June last year when the CBN rolled out the new loan-to-deposit ratio expanded by over N1 trillion owing mainly to the differentiated cash reserve requirement (DCRR) and the minimum LDR ratio specified by the apex bank during the year. A member of the Monetary Policy Committee (MPC) and  CBN  Deputy Governor, Corporate Services, Edward Adamu and Sausi Rafindadi, another MPC member, made this known  in their personal statements at the last MPC

Adamu said between January and October last year, gross credit expanded by over N1.0 trillion, with much of the increase actually occurring between June and October last year.

The sectors with the largest increases in credit during the period include agriculture, manufacturing, consumer credit and general commerce.

While reviewing the economy in the last 11 months, Adamu identified two defining factors for the positive turnaround, saying credit to the real sector and the naira exchange rate, were pivotal in the turn around.

He said: “On credit, the CBN has been able to turn around the situation through the LDR and the Global Standing Instruction (GSI) which aims to reduce credit risk. Given that interest rates have started to moderate and banking industry NPLs trending towards the regulatory 5.0 per cent level, money market activities could only be expected to buoy in months ahead.”

Rafindadi on his part, noted that current data revealed that the growth in credit to the private sector increased from 12.49 per cent in September to 13.08 per cent in October last yaer.

“An additional credit flows of N2.17 trillion was added between November 2019 and end of December 2019 to meet the 65 per cent target for LDR. In addition, data showed that the decline in NPL continued from the 9.4 per cent achieved in July and August 2019 to 6.56 per cent in October 2019 compared with 14.05 per cent in October 2018. The significant decline is largely attributed to recoveries, write-offs and disposals. This welcome development would further encourage bank lending,” Rafindadi said.

Source: The Nation

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