- CBN New LDR Policy to Hurt Treasury Market
The recent directive of the Central Bank of Nigeria mandating all Deposit Money Banks (DMBs) to maintain 60 percent Loan-to-Deposit ratio is expected to erase over N1 trillion off treasury markets, Obinna Uzoma, a Lagos based economist has stated.
Last week, the central bank had directed all banks in the country to beef up lending to the real sector in order to enhance economic productivity and deepen growth.
All Deposit Money Banks (DMBs) are to maintain 60 percent Loan-to-Deposit ratio by September.
According to the apex bank, DMBs that failed to comply with this regulatory requirement will be ‘fined to the tune of a Cash Reserve Requirement equivalent to half of the shortfall of the new LDR target.’
Experts, however, are saying the new directive could increase non-performing loan in the banking sector as lenders would have to abandon less risky financial instruments that generate income for the highly uncertain real sector.
“In order to meet the 60 percent target, banks will have to assume more risk in form of borrowing. This will mean diverting money typically channelled into less risky financial instruments that generate income. The capacity of banks to participate in open market operations will reduce to the tune of the current shortfall which has been estimated to about N1.3 trillion to N1.6 trillion,” Uzoma stated.
This could see bank like Zenith, the most profitable Nigerian bank, extending up to N6007.13 billion in loans to businesses by the third quarter.
While the United Bank of Africa will have to disburse about N423.71 billion in loans if it is to meet up with the new LDR target. Guaranty Trust Bank and Access Bank would have to grow their loan book to N200 billion each.
“The risks associated with the new loans that will be created in order to meet up with the target will have to be properly managed so as to not increase the already high banking industry Non-Performing Loan ratio.”
Currently, Nigerian banks have a loan portfolio of N15.45 trillion, with oil and gas accounting for 30 percent or N4.86 trillion of the total loan. Followed by the manufacturing sector (N2.2 trillion). The government (N1.37 trillion), while other key sectors struggle with the remaining.
The low credit facility to sectors that contribute the most to the economy, especially knowing that the oil and gas sector that is receiving most of the credit contribute less than 10 percent to the total economy, prompted the central bank to compel lenders to increase loan facility to the non-oil sector.
“Albeit the fear of excessive regulation, this might be the right move for the government as the already buoyant treasury market will fail to miss N1 trillion and the appetite of the foreign investors is well enough to fill the void that would be created by this regulation” Uzoma added.