‘Why CBN should shelve loan to deposit ratio policy’

By Helen Oji
Expert in the financial market has flayed the Central Bank of Nigeria (CBN) decision to retain Loan to Deposit Ratio (LDR) at 65 per cent, urging the apex bank to reconsider its stance in order to
forestall further depreciation of banking stocks in the nation’s stock market.

Specifically, the expert stressed the need for government to engender and fast track far reaching economic reform programmes that would create a more favourable business climate, boost real sector operations and ultimately bring about a reduction in inflation rate to five percent.
 
Addressing participants at the Investiture and Induction of Associates of the Chartered Institute of Stockbrokers (CIS), in Lagos at the weekend, the Founder of Stanbic IBTC Plc, Atedo Peterside, categorically stated that the stock market is on a downward trend due to the CBN monetary policy decisions of the apex bank.


He noted that the new policies have impacted negatively on share prices of banking stocks, which have continued to witness a free fall thereby, depressing the All-share index and market capitalisation.

“What the Central Bank of Nigeria has done is to come out with a loan to deposit risk which is rigid and punitive. The logical implication of that is that if banks take deposit, they must take loan for you and when they do not find loans to take, they stop deposits because if they take it, they cannot realise them.
 
He continued: “So if inflation is 12 per cent and banks are offering you deposit at one per cent to two per cent, what are the likely things you are going to do, you can buy foreign exchange, because investors have a choice, you can buy property, and you can also buy foreign exchange.

“Unless you are buying a stock that you know is going to be very cheap and it has value in dollar terms, the short everybody does is to think about speculating in foreign exchange, so these are the things that are making it impossible for the stock market to function.”
  
According to him, government must target a reduction of inflation rate to about five percent, if the nation must record reasonable level of growth.Furthermore, he urged the apex bank to guide against naira devaluation, noting fear of devaluation is disincentive to investment. The CBN, in exercise of its mandate to drive credit to the real sector of the economy particularly the small and medium scale enterprises (SMEs) had in October 2019, increased LDR to 65 per cent

However, analysts have argued that the new LDR policy has the potential to negatively impact the quality of banks’ loan portfolio in their attempt to meet the CBN target which could further increase the already high Non-Performing Loans (NPLs) especially in an economy beset by high inflationary trends and diminishing consumer demands.
Recall that after the September 30, 2019 deadline for banks to meet 60 per cent directive, the CBN raised the LDR of banks to 65 per cent, the apex bank gave its regulated entities December 31, 2019 deadline to meet its new requirement.

It noted that the credit level in the sector grew by N829.4 billion or 5.33 per cent at the end of May 2019 from N15.56 trillion to N16.39 trillion as at September 26.
The CBN disclosed this in a letter signed by the Director of Banking and Supervision, Bello Hassan, to all banks on, “Regulatory measures to improve lending to the real sector of the Nigerian economy

The apex bank noted the appreciable growth in the level of the industry credit, which increased by N829.4 billion or 5.33 per cent from N15.56 trillion at end of May 2019 to N16.39 trillion as of September 26, 2019 following its pronouncement on the above initiative.

“In order to sustain the momentum and in line with the provisions of our earlier letters, the minimum Loan to Deposit Ratio target for all Deposit Money Banks is hereby reviewed upwards from 60 per cent to 65 per cent.

“Consequently, all DMBs are required to attain a minimum LDR of 65 per cent by December 31, 2019 and 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 per cent in computing the LDR for this purpose.”