Loan-Deposit Rates of Nigerian Bank May Hit 70% By 2020- CBN

  • Credit To Oil & Gas Sector Rises To 30%

The Central Bank of Nigeria (CBN), on Tuesday in Yola, Adamawa State, said the Loan-To-Deposit Ratio (LDR) in the country could rise to 70% before the end of 2020.

The CBN had some months ago directed banks in the country to ensure 60% of their total deposits are given as loans to customers by the end of September.

Speaking on “the state of the Nigerian economy and implications for the stability of the banking system,” at the 2019 workshop for finance correspondents and business editors, by the Nigeria Deposit Insurance Corporation of Nigeria (NDIC), he said the banks were have been further directed to increase the ratio to 65% by the end of this month.

Dr. Hassan Mahmood, Deputy Director, Financial Policy and Regulation Department at the CBN, while fielding questions, recalled that N1.1tr worth of new loans was created between May and October. In just three months following the directive, he noted that N900bn was given out as new loans.

On the apex bank’s decision to lockout domestic non-bank players from its Open Market Operations (OMO), Mahmoud said it was initially created for short-term liquidity management, not as an investment vehicle as is transformed into. This, he noted, bloated the apex bank’s cost of managing liquidity, thereby eating deep into the surplus it could have remitted to the Federal Government at year-end.

He said the foreigners were not banned because of their huge investment that cannot just be ignored without repercussions, given that their investment is primarily in US Dollars. This, he noted, could eat deep into the nation’s foreign reserves and even lead to devaluation, among others, given the limits of domestic capital needed to fund the nation’s growth.

“Of the total $40bn reserves, 15% is in Foreign Portfolio Investment, which is of concern to the regulators, hence the appeal to them (these investors to repatriates their funds, whenever they have to) in an orderly manner.

He, however, stressed the safety and soundness of the nation’s financial system, judging by financial system stability criteria, adding that since the 2008 global financial crises, and the regulators have since put measures safety nets in place, as demonstrated during the crisis that followed.

They, however, drew attention to early warning signals, which are still within tolerable limits, should not be ignored, one of which is the 30% loans by Nigerian banks to the oil and gas sector.

He noted that 80% of the oil and gas loans are by the nation’s five largest banks, which together account for a significant proportion of total industry market share, such that if there is a sharp fall in oil price at the international market, there could be trouble.

Mahmood also noted the exposure of the banks to government, especially as 35 state governments had to be bailed out recently by the Federal Government; while manufacturing and services attracted 17% of total credit

He however assured that the regulators have taken adequate measures to ensure that the industry does not become troubled in any way.

The dynamics of total bank credit to the economy at N17tr, he continued, is changing from corporate to consumer borrowers, a situation he described as very good, just as total industry assets and liabilities stands at over N40tr.

At 15.2%, Capital Adequacy Ratio, which is another key soundness indicator in the banking industry, which measures the ability to absorb losses that may arise, he stressed, is very good, given that the regulatory threshold is 10%. While the BASEL threshold is 10%, he noted that those banks tagged “systematically important” have between 17 and 18%, even as many are restructuring or selling their loans.

While noting the significant improvement in ratio of Non-Performing Loans, he expressed satisfaction that the five largest banks have the least NPL ratios, indicating their level of safety.