LDR: Preferred Sectors ‘Unserved’ as Private Sector Credit Rises ₦4.2tn
- Lenders show Concern about Credit Risk
- Private Sector Credits Rise N4.2 trillion
- Low transmission to SMEs, Mortgage, Consumers lending etc.
- Banks are more concern about credit risk
- CBN could debit Banks about N280 billion for September
Contrary to expectation that the apex bank’s loan to deposit ratio would push credit to the apex bank preferred sectors, NOVA Merchant Bank Limited has hinted that distribution of loan continues to favour prime sectors and borrowers.
Failing for meeting loan to deposit ratio, the Central Bank of Nigeria has maintained punitive debits on banks cash reserves.
Explaining further in a note, NOVA said there is limited transmission to the CBN’s preferred sectors which include small and medium scale enterprises, retail, mortgage, and consumer lending as banks are more concerned about credit risk with current conditions
To stimulate economic growth, the CBN demanded in a circular directed to banks to ensure 65% of their total deposits should be disbursed as loans.
This has pushed total credit up, but results differ from expectation as banks maintained their respective risk appetite.
Compared to the level at the end of 2019, aggregate private sector credit increased by N2.14 trillion over the first eight months of 2020 to end August 2020 at N19.33 trillion.
Nova Merchant Bank Limited explained that the loan growth was accompanied by moderation in the prime lending rate.
Beyond doubt, analysts said the LDR policy has proven to be more potent in driving real sector lending.
At the same time, analysts said it has helped in moderating the cost of borrowing due to the increased competition for corporate names.
Compared to overall gross credit of the banking system in June 2019 before the introduction of the minimum LDR on July 3rd, 2019, the overall private sector credit has grown by N4.2 trillion.
Over the same period, Nova said the prime lending rate declined 4.04% to end August 2020 at 11.8% compared to 15.80% as at June 2019, with a year to date contraction by 3.23%.
However, the Merchant bank explained that notwithstanding the success of the LDR policy in driving credit creation and moderating lending rates, the distribution of loans continues to favour largely the prime sectors and borrowers.
It said there is limited transmission to the CBN’s preferred sectors of SMEs, retail, mortgage, and consumer lending as banks are more concerned about credit risk with current conditions
It has also been noted that since the first punitive debits for failing to meet LDR target in September 2019, the rates of debits have spiked even beyond the LDR punitive measures.
In a bid to reduce cost of liquidity in the banking sector, the CBN’s monetary policy committee (MPC) raised CRR by 500bps to 27.5% at the January meeting.
According to Nova, the move was also meant to combat possible foreign currency speculation induced by the impending liquidity, the CBN also initiated series of unusual debits.
But, between September 2019 and August 2020, the volume of banks’ reserve sterilized with the CBN expanded by N6.64 trillion.
Nova stated that the increase over financial year 2020 alone amount to N5.1 trillion to settle at N11.3 trillion at the end of August.
Beyond any doubt, analysts said the series of debits have to a large extent increased the effective cost of funds across the banking system.
It however noted that such increase has been largely passed on to the mid and small-scale borrowers.
Reflecting the huge system liquidity occasioned by the exclusion of non-bank financial institutions and individuals from investing in Open Market Operations and minimal government securities to mop-up such funds, the level of deposit in the banking system has been on a consistent increase, with impact on the banking system funding base.
MarketForces reported that in September, 2018, the CBN banned non-bank financial institutions and individuals from making investment in its OMO auction.
After the second quarter of 2020 debit of about N341 billion, the funding base in the banking system has grown by N854 billion to N31 trillion at the end of August with LDR over the same period at 62.34%.
Nova said assuming a best-case scenario of 3% increase in the LDR to 65.34% at the end of September, average over the quarter would still fall below CBN preferred daily average of 65% at 63.23%.
Accordingly, the firm estimates that the CBN could sterilize about N280 billion from the banking system at the end of September as LDR punitive measure.
Meanwhile, analysts expressed that the constrained liquidity in the banking system occasioned by the series of debits is resulting in increases in the effective cost of funds across the banking system.
Nova explained that the recent moderation in savings rate and falling interest rate on term deposits have moderated the impact.
“Beyond doubt, we believe a gradual refund of excess CRR will have more positive impact on overall lending rates, spur credit demand and support the productive sectors of the economy”, Nova Merchant Bank stated.
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LDR: Preferred Sectors ‘Unserved’ as Private Sector Credit Rises ₦4.2tn
