The Central Bank of Nigeria (CBN) has in the past three weeks unleashed policies seeking to get Deposit Money Banks (DMBs) to lend to the real sector of the economy, in order to get the economy on the right footing again. First, the apex bank issued a circular on mobile money and financial inclusion; second, it hinted of banking sector re-capitalisation in the next five years; third, it released circular prohibiting banks from having a loan to deposit ratio less than 60 per cent; and finally asked banks not to charge interest on excess cash balance above two billion naira. EMEKA OKOROANYANWU and BABAJIDE OKEOWO report.
Under Godwin Emefiele as the governor, the CBN had previously pushed its policies towards monetary stability, targeted principally at getting inflation under control, growing foreign reserves and stabilizing the local currency, the naira. The policies seem to have yielded results as the economy has recorded about 7.50 percentage point decline in inflation, a rise in foreign exchange reserves to above $45 billion, even as the naira has stabilized at N360 to N361 to the US$1 in the past four years.
Having achieved its initial target, the CBN now wants economic growth, a cardinal policy in the five year Emefiele agenda released a month ago. And to drive the agenda, the governor is targeting banks to open their vaults to the real sector of the economy. The Nigeria economy had in the past experienced slow growth in commercial bank loans, which analysts blamed on the weak supply side of the economy. They said the CBN’s approach to galvanising growth had been skewed towards the supply side, and it has deliberately held down loan rates in several areas, such as agriculture, in order to implement its policy. The problem with this initiative, according to analysts at Proshare, is that commercial bank loans have not grown as a result, leading the CBN to come up with more radical measures than before.
For instance, a typical Nigerian bank said the analyst keeps cash balances when the CBN Open Market Operation (OMO) auctions are imminent, driving up overnight lending rates around auction dates.
With the fresh policies from the CBN, it is envisaged that the excess liquidity trapped within the banking system would be unlocked and channelled towards the real economy. How this will play out will be unveiled in the future as the banks grapple with the policies. Analysts have, however, cautioned the apex bank on the policies, even as they have hailed the intentions behind them.
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Professor Leo Ukpong, Dean of Finance at University of Uyo, Nigeria said the Central Bank of Nigeria should not force banks to advance loans to the real sector saying such a directive is capable of causing crisis in the banking industry and increasing Non Performing Loans, NPLs in the sector.
“Banks give loans to where they can make a profit, they also want to make sure that the people they are extending the loan to can pay back the loan, thereby, getting the interest, that is the number one aim of any bank. If the borrower is a risky prospect, banks will either increase the interest rate or decline the loan, period.
“The CBN instructing commercial banks to increase loans to the real sector and cut down on the investment in T-Bills is the craziest stuff in the world. The reason banks invest the money they collect from depositors into treasury bonds is because the interest rate is very high and risk is almost zero. The government will practically not default, it will bring in more money and pay it off. Banks are only doing what a rational lender would do.
“The way forward is to instruct the CBN to drop-down interest rates so that people can borrow money. It is wrong to force commercial banks to lend to risky borrowers, this way, the level of loan defaults will increase, thereby causing another problem entirely.
“I do not know where the CBN got this idea from, it doesn’t make sense for CBN to tell commercial banks not to buy treasury bills and extend loans to the real sector, what if they default, who is going to guarantee them, the banks will be in trouble, because you are forcing them to go and loan irrespective of the risk involved. The CBN is trying to create another set of trouble for the banks” Professor Ukpong said.
He went on to advice the federal and state governments to cut down on its borrowing in a bid to stopping banks from rushing for treasury bills.
“This brings me to another issue that we have been shouting about for several years, the federal government is borrowing too much, the Debt Management Office, DMO is borrowing too much because they have to fund all the borrowing by the federal government to fund the budget and whatever they approve for themselves they go and eat alone.
“When you borrow too much and the tenor goes up, you must be forced to pay higher interest rates, what the government has done through the DMO is to increase the interest rate on the loans they borrow from the public, thereby giving incentives to banks. So, the banks understandably think that well let me go and deposit in that and sit back and do nothing and get that high-interest rate, and all of a sudden, the CBN is saying no, we will not let you invest in this. “Whenever you try to control the lending and the deposit phenomenon which is supposed to be market-driven, you are going to create another problem, I don’t think the CBN is right, I think they are very wrong with this move. They should rather work on ensuring that federal and state governments cut down on borrowing, as such the interest rate will come down and banks can look at other places they can lend money to, like the private sector. Until that is done, you will be surprised that it is not going to work,” he added.
Reacting also to the apex bank’s directive, Fitch Ratings Inc, a leading global credit rating agency said the requirement for Nigerian banks to have a loan-to-deposit ratio (LDR) of at least 60per cent at the end of September is credit-negative for the sector.
“We believe it will push some banks to significantly increase lending to riskier borrowers, potentially with looser underwriting or under-pricing of risk. Achieving the new LDR requirement in such a short timescale will be very difficult for some banks given their lending levels, particularly if customer deposits continue to grow at present rates.
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“The sector’s overall LDR was 57 per cent at end of May, according to CBN data. This is low relative to many markets and reflects banks’ concern about the risk to asset quality from Nigeria’s often volatile operating environment. Nigeria’s largest banks, with the exception of Access Bank, have LDRs below or close to 60 per cent and will be among the most affected by the new requirement. It is unlikely that there is sufficient demand from good-quality borrowers for banks to meet the target without relaxing their underwriting or pricing standards.
“Banks continue to struggle with high impaired and other problem loans, which are partly the cause for muted lending since 2016. The present operating conditions are not conducive to loan growth, and rapid lending during the fragile economic recovery could increase asset-quality problems in the future. Chasing loan growth could also weaken banks’ profitability if they cut margins to attract customers, and because of the need to set aside expected credit loss provisions under IFRS 9 when loans are originated,” the agency said.
On his part, Johnson Chukwu, Chief Executive Officer at Cowry Asset Management Limited in a telephone interview with The Nigerian Xpress, said the directive was as a result of an unusual situation.
“It is a directive that was borne out of an unusual situation and circumstances. There is a compelling need to grow the economy beyond its current growth rate, and we are not aware of so many and any fiscal policies in place that can grow the real sector faster than their growth rate. This is why the CBN governor is adopting an unconventional tool to compel credit to the real sector, hoping that such credit will stimulate the needed growth beyond what it is.
“As the CBN governor has said in his five year plan, that among his priority is to have a double-digit economic growth rate in the economy and if we take into consideration the current growth rate of the economy of about two per cent, you will understand that there is a need to adopt an unconventional economic tool to drive growth beyond the current rate. This is what the CBN has done by adopting an unconventional tool with the hope that if the banks are lending to the real sector, that will stimulate production which in turn will stimulate employment. It is an unconventional tool adopted in an abnormal situation, he said.
He further went on to say what the CBN was doing was to use micro-economic tools to channel credit to the real sector.
“The CBN is using micro-economic tools to channel credit to the real sector. For instance, they have said that Small and Medium Enterprises, SMEs, retail, mortgage, and consumer lending, would be assigned a weight of 150 percent in computing the LDR to encourage them” he added.
He called on banks to come up with a mitigating plan to curtail the effect of non-performing loans.
“It is now left for the banks to come up with risk-mitigating mechanism, they can also go back to the CBN to ask for a kind of risk-mitigating arrangement. The onus is on the banks to deploy risk mechanism that will minimise the exposure or ensure that the risk is shared with other stakeholders so that they do not carry the entire burden of lending to sectors that are considered as high-risk sectors” he concluded
Recall that in a letter to all banks dated July, 03, 2019, the Central Bank of Nigeria (CBN), in its bid to improve lending to the real sector of the Nigerian economy; mandated all Deposit Money Banks (DMB) to maintain a Loan to Deposit Ratio (LDR) of 60 per cent 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.
Analysts note that as a result of high Open Market Operations (OMO) and treasury bills yield rates as high as 17 per cent, banks shifted their focus from lending to the private sector to lending to the Government through investments in treasury bills.
For example, in year 2018, Zenith Bank invested N1 trillion on treasury bills alone, which represent 27.11 per cent of the total customers’ deposit of N3.69tln. During this period, loans and advances were N1.82trillion, which represents an LDR of 49.40 per cent. However, the LDR of Zenith Bank was 76.73 per cent in 2016 as loans and advances during the period was N2.29trillion while customers’ deposit was N2.98 trillion with a sum of N557.36 trillion invested in treasury bills.
How this directive pans out in the nearest future is still a matter of wait and see.