Leading Deposit Money Banks (DMBs) including Access Holdings Plc, Guaranty Trust Holdings Company Plc (GTCO), and Zenith Bank Plc, among others in Nigeria have again defaulted on the 65 per cent Loan-to-Deposit ratio policy of the Central Bank of Nigeria (CBN) in the first half of the year ended June 30, 2023.
The banks also failed to comply with the apex bank policy in the first half of 2022.
The LDR is the relationship between total loans and total deposits, expressed as a percentage. The LDR gives an insight into the proportion of assets a bank can create from its liabilities. It also indicates the amount of income/profit a bank can generate. It is expected that the larger the deposits (liabilities), the larger the amount of assets (loans) it creates.
CBN in October 2019 raised the LDR of banks to 65 per cent, after the September 30, 2019 deadline given to the banks to meet its 60 per cent directive. The Apex Bank later extended the deadline of 65 per cent LDR to March 31, 2020.
Although there were speculations that the threshold could be raised to 70 per cent by the end of 2020, the CBN stated in the circular that “All DMBs are required to maintain this level and are further advised that average daily figures shall be applied to assess compliance going forward.”
In the first half of 2023 which ended on June 30th, Access Holdings declared 61.5 per cent LDR in H1 2023 from 50.8 per cent in 2022, while GTCO announced 36.60 per cent LDR as of H1 2023 from 40.9 per cent reported in 2022.
Zenith Bank declared 50.4 per cent LDR in H1 2023 from 51.6 per cent in 2022. The Group’s LDR of Zenith Bank closed June 30, 2023, at 46.3 per cent from 45.6 per cent reported in 2022.
FBN Holdings posted 60.2 per cent LDR as of June 30, 2023, from 55.9 per cent in 2022, while UBA reported 42.03 per cent LDR as of June 30, 2023, from 44 per cent reported in the 2022 full financial year.
DMBs have been cautious of extending credit to the private sector due to the country’s economic downturn, occasioned by the impact of post-COVID-19 which crippled the global economy, the Russia-Ukraine war, among others.
Despite aggressively growing customer base, and sustained increase in loans & advances to customers, these Teir-1 banks between 2019 and 2020 have come short of meeting the LDR policy of CBN.
However, an investigation by InsideBussinessNG revealed that GTCO, among the investigated Tier-1 DMBs, has the lowest LDR.
Access Bank with 62.1 per cent LDR in 2019 reported 50.7 per cent in 2020, a decline of 11.4 per cent while GTCO’s LDR closed 2020 at 43.2 per cent from 60.62 per cent reported in 2019.
FBN Holdings reported an LDR of 46.8 per cent in 2020 from 48 per cent in 2019.
Commenting, the Vice President, of Highcap Securities Limited, David Adnori stated that the demand by CBN on 65 per cent LDR is a difficult task, stating that, “Loans are granted to borrowers’ in-line with the cannon of lending.
“Every bank has its peculiarity of lending to the real sector in terms of existing exposure to clients; how those funds are performing? Also, the kind of deposit they have to extend lending to the real sector.
“Lending to the real sector is not something that can be regulated.
However, the CBN had pointed out that failure to achieve the target would continue to attract levies of additional cash reserve requirement of 50 per cent of the lending shortfall of the target LDR.
“The CBN has noticed a remarkable increase in the size of gross credit by deposit money banks (DMBs) to customers. “Accordingly, the CBN has decided to retain the minimum 65 per cent LDR in the interim. All DMBs are required to maintain this level and are further advised that average daily figures are to be applied to assess compliance going forward.
“The incentive which assigns a weight of 150 per cent in respect of lending to SMEs, retail, mortgage and consumer lending shall continue to apply, while failure to achieve the target shall continue to attract a levy of additional cash reserve requirement of 50 per cent of the lending shortfall of the target LDR on or before March 31, 2020.
“DMBs are further encouraged to maintain strong risk management practices regarding their lending operations. The CBN shall continue to monitor compliance, review market developments and make further alterations in the LDR as it deems appropriate,” it stated.
A stockbroker, Rotimi Fakeyejo explained that because the economy is undergoing a crisis, there are no good credits which are seeking funding.
According to him: “So, if the banks have to lend, they have to lend to some prime consumers. The banks need to consider if they have enough requests to be able to meet that threshold.”
He also noted that banks have a lot of their funds warehoused in the Central Bank in the form of Cash Reserve Ratio (CRR), which puts a lot of pressure on them in terms of lending.
“Banks have to balance between liquidity and deposit-to-lending ratios. These factors are to be considered before meeting this requirement,” he added.
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