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New CBN minimum LDR requirement throws banks off balance

Emeka Okoroanyanwu

Central Bank of Nigeria (CBN) in a letter last week mandated all Deposit Money Banks (DMB) to maintain a Loan to Deposit Ratio (LDR) of 60 per cent by September 30, 2019.

The policy, the apex bank said, was aimed at improving lending to the real sector of the economy.

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

While applauding the move by the CBN to increase lending to the private sector, analysts fear that the move may compound the fragile non-performing loans situation of a majority of the banks.

The policy may mean a sharp shift by banks from lending to the government to lending to the private sector, considered a high risk investment area by the banks.

Because of high yields from Open Market Operations (OMO) and treasury bills to rates as high as 17 per cent, banks had shifted their focus from lending to the private sector to lending to government through investments in treasury bills.

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According to figures from Proshare, a financial service company based in Lagos, for example, in FY 2018, Zenith Bank invested N1 trillion on treasury bills alone, which represent 27.11 per cent of the total customers’ deposit of N3.69 trillion. During this period, loans and advances were N1.82tln, which represents an LDR of 49.40 per cent. However, the LDR of Zenith Bank was 76.73 per cent in FY 2016 as loans and advances during the period was N2.29tln while customers’ deposit was N2.98tln with a sum of N557.36bln invested in treasury bills.

Of the 15 listed Deposit Money Banks (DMBs) reviewed, Fidelity Bank had the highest LDR of 95 per cent in Q1 2019. Surprisingly, only one tier-1 bank has an LDR above the minimum 60% regulatory requirement as the tier-2 banks dominated with higher loans to deposit ratios.

With the exception of Unity Bank, four out of the five other big banks were below the 60 per cent LDR minimum requirement.

FBNH, UBA, Zenith Bank and Guaranty, for instance, need to increase their current loans and advances to customers by 12 per cent, 12 per cent, 10per cent and 7 per cent respectively over the next 3 months in order to meet the new regulatory requirement of 60 per cent.

Eight banks fell into the red LDR gap with Unity Bank taking the lead with a deficit of 36 per cent. The large LDR gap implies that at current customer deposit level, Unity Bank needs an additional retail loan growth of N91.47bln between now and 30th September to meet up with the minimum LDR requirement. So also, seven other banks need to adjust their customers’ loan books to meet up with the LDR requirement within the given deadline. Fidelity, Sterling FCMB, WEMA and Access are within the safe zone with Access having the least surplus of 6 per cent, which is still above the 60 per cent minimum requirement.