DMBs May Not Comply With CBN 60% LDR Directive

• DMBs May Not Comply With CBN 60% LDR Directive

Deposit Money Banks may not significantly increase credit facility to the economy as the Central Bank of Nigeria had directed under the 60 percent loan-to-deposit Ratio.

Analysts at Augusto& Co, a credit risk management company, stated this in a recent report released on the Nigerian banking sector.

One of the analysts, Ada Ufomadu, explained that the directive mandating all DMBS to maintain 60 percent LDR by September 30, 2019 won’t be effective among Tier 1 banks as most Tier 1 lenders are wary of rising credit risks.

She said, “The focus of the LDR minimum is to promote consumer and mortgage credit to drive demand. Most tier 2 banks comply with the new LDR minimum requirement, but not all Tier 1 banks do.

“We do not foresee a significant increase in loan book due to a potential increase in credit risks.”

She also highlighted the short window given to the banks as a key challenge in meeting the CBN directive.

Investment experts had criticised the LDR directive and complained it could return the banking sector back to the days of high bad debts and poor profit.

While some admit the policy may spur economic growth, they also agreed that new investments without a conducive operating environment are likely to fail given the economic situation of the country.

Therefore, they agreed that until the Muhammadu Buhari administration formulates the right policy to encourage participation, investors (both local and foreign) will remain apprehensive.

The Nigerian Stock Exchange has lost over 13 percent of its market value this year despite both MTN Nigeria and Airtel Africa listing on the bourse. Another indication of broad-based weak market confidence and low activity on the exchange.

This, experts expect to worsen for banks’ stocks as investors have started dumping them to avoid unnecessary exposure to risk.

Also, with global crude oil falling below the central bank $60 benchmark, the apex bank is fast losing its ability to cushion the economy in case of economic recession or shock to the financial system. Therefore, banks would be careful in adopting the 60 percent loan to deposit ratio directive come September.