Only five deposit money banks (DMBs) listed on the Nigerian Exchange Limited have Loan to Deposit Ratios (LDR) above 65 percent, while 13 others fall below the regulatory threshold due to a lack of good borrowers and fear of recording high non-performing loans (NPLs), analysts said.
The five banks, which are mostly Tier 1 lenders, are Unity Bank (83.24 percent), Fidelity Bank (81.96 percent), Stanbic IBTC (81.76 percent), FCMB (68.24 percent), and Sterling Bank (67.16 percent), data from Proshare’s banking sector report have shown.
“One of the reasons is the inability to get a quality borrower to give loan to, meaning businesses that can repay the loans are lacking,” the executive director of a bank, who pleaded anonymity, said.
On the implication, the director said there would be no availability of credit to the real sector and small and medium enterprises.
He said: “Those who need money for business will not be able to get it. Secondly, there will be no jobs. This further puts pressure on the government’s efforts to create jobs.
“Many businesses do not have electricity, no diesel, and no cash flows to run their business; it becomes a huge problem, resulting in socio-economic issues.”
Banks with LDR below 65 percent include Union Bank (63.22 percent), Zenith Bank (61.96 percent), Access Bank (60.16 percent), FBNH (51.09 percent), Ecobank Transnational Inc. (49.09 percent), Wema Bank (45.10 percent), GTCO (44.93 percent) and UBA (42.09 percent).
Johnson Chukwu, managing director/CEO of Cowry Asset Management Limited, said because of the country’s sluggish growth, the number of good borrowers is declining.
According to him, banks would rather not meet the LDR directive than have non-performing loans.
The banking industry’s NPL ratio has continued to trend below the prudential threshold of 5 percent. It decreased to 4.80 percent at the end of February 2022 from 6.38 percent in February 2021.
The downward trend was attributable to recoveries, restructuring of facilities and sound management practices by DMBs, according to Kingsley Obiora, deputy governor in charge of economic policy at the Central Bank of Nigeria (CBN).
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In 2019, the CBN raised the LDR of commercial banks to 65 percent in order to spur growth in the real sector of the economy.
Ayokunle Olubunmi, head of financial institutions ratings, Agusto and Co Limited, said the Cash Reserve Ratio (CRR) that banks have with the CBN is significantly high.
CRR is a percentage of a bank’s total deposit that it must maintain with the central bank at all times.
The CBN increased the CRR from 22.5 percent to 27.5 percent in January 2020. At 27.5 percent, Nigeria has the highest reserve requirement in sub-Saharan Africa, while peers such as South Africa, Kenya, and Ghana all have CRRs below 10 percent.
Nigerian banks had as much as N15 trillion in cash reserves idling away with the CBN in 2021, a move that affected the profitability of the lenders, Bode Agusto, CEO of Agusto & Co, said in January this year.
According to Olubunmi, there are some banks that have a lot of deposits with the CBN. “If you have such a huge amount of deposit with the CBN, how will you lend? You cannot be holding my deposit based on CRR debit and you are telling me to lend. You can see that it is contradictory,” he said.
He said what some banks do is approach the Differentiated Cash Reserves Requirement (DCRR) window but it has some conditions attached to it. Sometimes it is even restricted to some banks.
The CBN, in 2020, introduced the DCRR regime. Under this programme, banks interested in providing credit finance to greenfield (new) and brownfield (expansion) projects/customers in the real sector (agriculture and manufacturing) are provided with cheap funds from their CRR.
On implications, Olubunmi said: “It would result in lower lending activities as the amount of money banks can lend to the real sector is sterilised. Some banks engage with the CBN on this and the CBN also releases it to banks.”
He said one of the banks in 2021 had 90 percent of its deposit sterilised with the CBN, adding that not all banks had been successful with the CBN on the issue of CRR.
On December 2, 2020, the regulator introduced a special 90 days tenor bill with zero coupon as part of efforts to deepen the financial markets.
Bigger banks by asset size seem to find it difficult to lend out their deposits. The problem appears to be that the larger the deposits, the more conservative the bank becomes in creating risk assets to prevent a rise in its NPL ratio. Most banks want to keep their NPL ratio below the 5 percent statutory threshold, Proshare said.