writes Tony Chukwunyem 
Clearly, striving to ensure that the country’s economy is shielded from the devastating impact of the Coronavirus (COVID-19) pandemic, the Central Bank of Nigeria (CBN) is not easing pressure on lenders to increase lending to the private sector, writes Tony Chukwunyem
LDR policy In a letter to deposit money banks (DMBs) posted on its website on July 4, last year, entitled: “Regulatory measures to improve lending to economy,” the apex bank stated that:
“In order to ramp up growth in the Nigerian economy through investment in the real sector, the CBN has approved the following measures: All DMBs are hereby required to maintain a minimum Loan to Deposit Ratio (LDR) of 60 per cent by September 30, 2019.
“This ratio shall be subject to quarterly review.
To encourage SMEs, retail, mortgage and consumer lending, these sectors shall be assigned a weight of 150 percent in computing the LDR for this purpose.
The CBN shall provide a framework for classification of enterprises/businesses that fall under these categories. Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall of the target LDR.”
The CBN in the letter, was ordering lenders to give out a minimum of 60 per cent of their deposits as loans with effect from September 2019.
Specifically, 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.
Analysts noted at the time that the CBN had to take the step after its repeated appeals to DMBs to increase lending to the real sector in order speed up the country’s sluggish economic growth, largely went unheeded. Policy success In fact, the move appeared to be an instant success as it announced that an additional N829.4 billion loans had been extended by DMBs between May and September 2019.
The development made the regulator to review the minimum LDR requirements for DMBs from 60 per cent to 65 per cent, which the lenders had to meet by December 31, 2019. Furthermore, in keeping to its threat of sanction for noncompliance, the CBN slammed about N499.1 billion on 12 banks as additional CRR for failing to attain the initial 60 per cent LDR by the September deadline.
Further evidence of the success of the LDR policy could also be seen from the fact that data released by the CBN since the introduction of the policy show a steady increase in DMBs’ loans to the private sector. For instance, the communiqué issued at the end of the CBN’s Monetary Policy Committee (MPC) meeting in March, states that:
“The Committee noted with satisfaction the growth in aggregate credit by N2.35 trillion since the inception of the LDR policy, reflecting the potency of the policy and thus urged the Management of the Bank to sustain the current momentum of improved flow of credit to the private sector in Nigeria.”
Crisis
However, following the spread of coronavirus to these parts and concerns that the effects on the financial sector by the crisis could lead to a spike in banks’ non-performing loans (NPLs), there was
speculation in some quarters that the CBN would stop putting pressure on DMBs to increase lending to the private sector. But the speculation was put to rest by the regulator’s announcement of a combined stimulus package of about N3.5 trillion in targeted measures to households, businesses, manufacturers and healthcare providers, to help the economy cope with the impact of the pandemic. Indeed, the communiqué issued by the MPC at the end of its May meeting stated:
“The Committee noted the stability in the banking system shown by the increase in total asset by 18.8 per cent and total deposits by 25.52 per cent (yearon- year).
The performance of the Loan-to-Deposit Ratio (LDR) policy, which was introduced in July 2019, showed that total credits increased by N3.1 trillion or 20.45 per cent, with manufacturing, retail & consumer loans, general commerce and agriculture as major beneficiaries.
“The committee recognised that under the N100 billion Healthcare Sector Intervention Fund, the bank has approved and disbursed N10.15 billion for some projects for the establishment of advanced diagnostic and health centres and the expansion of some pharmaceutical plants for essential drugs and intravenous fluids.
“As part of the N1 trillion intervention targeted at agriculture and manufacturing firms, the bank has disbursed N93.2 billion under the Real Sector Support Fund to boost local manufacturing and production across critical sectors.
This consists of over 44 greenfield and brownfield projects.
The bank has also approved N10.9 billion to 14,331 beneficiaries under the N50 billion Targeted Credit Facility for households and SME’s, out of which N4.1 billion has been disbursed to 5,868 successful beneficiaries.
The committee directed management to reach out to the banks to encourage them to offer and disburse these funds to those priority sectors of the economy so as to stimulate aggregate demand and create more jobs.”
Significantly, in her personal statement at the meeting, a member of the MPC and Deputy Governor, Financial System Stability Directorate, CBN, Mrs. Aisha Ahmad, called for more aggressive measures to boost credit flow to the private sector.
She said: “The coronavirusinduced global economic crisis is pervasive, with heightened uncertainty for the medium-term economic outlook.
In Nigeria, early effects of the crisis and containment measures have reflected in modest decline in output growth, exchange rate depreciation, rising public debts and domestic prices amidst existing structural challenges.
“While these impacts on the Nigerian economy continue to evolve, even as some resilience is acknowledged, particularly in healthier than expected Q1’20 GDP numbers, there is urgent need to maintain this trajectory to prevent a recession and engender sustained recovery.
“The rising domestic price level attributed to a combination of monetary and structural factors, also poses additional risk to the muted growth environment.
This presents the monetary authority with a difficult tradeoff, amidst limited tools to balance its primary price and monetary stability remit – given the negative direction of inflation and exchange rates with promoting GDP growth.”
Continuing, she said: “In my view, an aggressive move to reflate the economy should be the primary objective at this time.
This can be partly achieved by lowering the policy rate to stimulate aggregate demand and direct credit to growth-enhancing sectors of the real economy. This measure would help lower domestic lending rates
which have trended downwards due to increasing supply of loans via the LDR policy, expand access to credit, stimulate employment and improve domestic economic activity.”
Mrs. Ahmad also suggested that in order to absorb excess liquidity from fiscal and monetary injections and curb monetaryinduced inflation that may potentially arise from a reduction in the benchmark interest rate – the Monetary Policy Rate (MPR) – the CBN could use its CRR tool.
Other members of the MPC apparently agreed with her, because they voted to reduce the MPR from 13.5 per cent to 12.5 per cent at that meeting.
CRR/LDR debits
In addition, since that move, the CBN has frequently debited the accounts of lenders that failed to comply with its CRR and LDR requirements.
On July 3, for instance, the regulator withdrew N122billion from the accounts of about 20 DMBs for non-compliance with the requirements.
Two weeks earlier, the CBN had collected N216.1bilion from 26 lenders for also failing to meet CRR targets. It had previously debited the same number of banks N459.7 billion for the same violation. Integration of non-interest window in intervention programmes
Also, only recently, the CBN announced that it has plans to release a framework for the integration of non-interest window in all its intervention programmes, particularly the Anchor Borrowers’ Programme (ABP) and the Targeted Credit Facility (TCF) to support households and Micro, Small and Medium Enterprises (MSMEs) affected by the COVID- 19 pandemic, as something that was long overdue.
According to the Director, Corporate Communications, CBN, Isaac Okorafor, the creation of a non-interest window followed appeals by concerned stakeholders for farmers across the country to also be considered for funding under the non-interest window. Interestingly, although a few banks have said they would reduce lending this year due to the coronavirus crisis, there are some that are keen on taking advantage of the crisis to increase lending to sectors that require it at this period.
One of the latter lenders is FCMB, which announced in May that it was targeting a loan growth of 10 per cent to 14 per cent this year to companies not only weathering the impact of the Coronavirus pandemic, but needing loans to increase output.
Conclusion
According to financial analysts, it is important that the CBN sustains credit growth necessary for the maintenance of sustained economic growth, especially given that the country is still tackling the coronavirus crisis.
