Nigerian LDR policy weakens banks’ balance sheets, IMF says

The International Monetary Fund has disclosed that the balance sheets of banks would be weak due to the directive from the Central Bank of Nigeria that deposit money banks should achieve a minimum loan-to-deposit ratio.

While the CBN reviewed the minimum LDR from 60% in September to 65% in October to improve lending to the real sector of the nation’s economy, the global firm argued in its Regional Economic Outlook for sub-Saharan Africa report that the development would significantly weaken banks’ balance sheets and lower the cost of funds.

What it means: Mission Chief and Senior Resident Representative for Nigeria, IMF, Amine Mati, explained that the IMF was of the view that the regulation might need to be revisited in terms of the potential pressure on non-performing loans.

According to the report, Nigeria is projected to grow at 2.5% in 2020, up from 2.3% in 2019, driven by both oil and non-oil sectors.

It also projected the nation’s medium-term growth at slightly higher than 2.5% and that implies that no progress in per capita growth. This low growth is driven by insufficient policy adjustment, a large infrastructure gap, low private investment, and banking sector vulnerabilities.

The IMF noted that Nigeria continued to have low tax rates, narrow tax bases and broad exemptions.

It said, “In several countries, tax administrative capacities remain weak, and governance is a concern. Also, the informal sector is large in many countries (such as Angola, Central African Republic, Chad, Guinea and Nigeria), resulting in low tax compliance.

“Mobilising more domestic revenue requires improving tax administration (such as assigning tax identification numbers for commercial importers, improving land registries, and strengthening tax audit functions, customs administration, and compliance management of large taxpayers) and reforms to broaden revenue bases, including through fewer exemptions.”

Backstory: Nairametrics had reported that the CBN issued a fresh circular mandating commercial banks operating in the country to lend out up to 65% of their customer deposits.

In the circular addressed to all banks obtained by Nairametrics, the CBN disclosed that the minimum LDR target for all DMBs has been reviewed upward from the initial 60% to 65%.

A new LDR: According to the information contained in the circular titled: ‘Regulatory measures to improve lending to the real sector of the Nigerian economy’, the major reason cited by the CBN for the newly revised LDR is the noticeable “growth in the level of the industry gross credit”.

  • For instance, the apex bank stated that the industry gross credit increased by N829.4 billion or 5.33% from 15.5 trillion at the end of May 2019 to N16.3 trillion as at September 26, 2019.
  • The CBN, therefore, disclosed that the LDR was reviewed upward in line with provisions of the earlier circular and in order to sustain the momentum.

The apex bank said failure to meet the minimum LDR would result in a levy of additional cash reserve requirement equal to 50% of the lending shortfall of the target LDR.

The CRR is the share of a bank’s total customer deposit that must be kept with the CBN in the form of liquid cash. It is currently at 22.5%.

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