65% LDR: Banks hike provision for bad loans


…NPL ratio to increase in 2020 —Analysts

By Kayode Tokede

Banks operating in the country have significantly increased impairment charges on loans amid the Central Bank of Nigeria (CBN) directive to meet the 65 per cent Loan-to-Deposit ratio (LDR), Nigerian NewsDirect gathered.

Our correspondent gathered that banks were lending to real sector after the federal government ease COVID-19 lockdown and at the same time aggressively going after obligor to recovered loans.

With the CBN’s LDR policy, Nigerian NewsDirect also gathered that banks loans to deposit has increased with big banks operating in the country maintaining Non-Performing Loans (NPLs) below five per cent.

However, the nine months unaudited results of listed banks on the Nigeria Stock Exchange (NSE), showed significant increase in impairment charges.

Specifically, Fidelity Bank Plc reported impairment charges of N11.04 billion in nine months of 2020 as against credit loss reversal of N4.8billion reported in nine months of 2019.

Also, Zenith bank plc reported 37.5 per cent increase in impairment charges to N25billion in nine months of 2020 from N18.26billion reported in nine months of 2019.

Meanwhile, United Bank for Africa plc reported N11.48billion on net impairment charges on loan receivable in nine months of 2020 as against N6.66billion in nine months of 2019, while FBN Holdings reported 64 per cent growth in its impairment charges for losses to N46.7billion in nine months of 2020 compared to N28.46billion reported in nine months of 2019.

An economist and President, Association of Capital Markets Academics of Nigeria (ACMAN), Prof. Uche Uwaleke, stated that aggressive lending by banks forced hike in impairment charges, stressing that it might affect banks profitability by the end of 2020 financial year.

“Banks are expected to provide for 50 per cent if the interest payment is not coming within 180days. If it is for 90 days, 10 per cent and 360 days, 100 per cent.

“We can’t be talking about 360 because it is not up to one year. COVID-19 lockdown too will also contribute to loan impairment.

“The 65 per cent LDR of CBN means loans to customer went out heavily in nine months and banks are expected to make provision.

“The CBN confirmed it that loans to private sector increased. The LDR is working in two ways. One, it has increased credit to the private sector and it has contributed loan provisions banks are making.

“If we have hike in Non-Performing Loans, it may also be responsible for that.”

The head, Investment research & business Development, Pac holdings, Moses Ojo attributed hike in banks impairment charge to CBN 65 per cent LDR policy that mandate lending to real sector.

“The situation revealed that banks were following the 65 per cent LDR policy of the CBN.

“The LDR policy has made banks increased lending and at the sometime making provision for bad loans. Banks are under the obligation of meeting the 65 per cent LDR or face sanction. Some banks are granting loans to people who are not qualify for it and they know they might likely default.”

The Central Bank of Nigeria (CBN) had disclosed that credit to private sector dropped by 2.2 per cent in September 2020 to N29.7trillion from N30.38trillion in August.

However, between January and September, the money and credit statistics by the apex bank noted that credit to private sector gained 11.48 per cent from N26.65trillion in January to N29.7trillion in September.

Our correspondent gathered that credit to private sector closed February at N26.57trillion. It increase significantly to N28.3trillion in March and appreciated further to N28.78trillion in April.

The Deputy Governor, Financial System Stability, CBN, Mrs. Aisha Ahmad who gave update in her personal comment at September’s Monetary Policy Committee (MPC) meeting, said credit to the economy increased by N3.77trillion from N15.57trillion at end-May 2019 to N19.3trillion at end-August.

She attributed the growth to the apex bank’s Loans to Deposit (LDR) policy that was introduced last

“Focused implementation of the LDR policy over the last year continues to promote credit growth to the real sector and lower deposit and lending rates, – which supported banks’ net interest margins,” she said.

She said the significant growth recorded in manufacturing, consumer credit, general commerce and agriculture.”

The Deputy Governor,Economic Policy, CBN, Dr. Kingsley Obiora noted that despite the persistence of the pandemic, the financial system has remained relatively stable and robust to withstand shocks.

“Credit to various sectors witnessed a significant boost from N15.57 trillion to N19.33 trillion between May 2019 and August 2020.

“This outcome reflects the continued implementation of the LDR Policy. In particular, the growth in credit was mainly directed to manufacturing (N866.27 billion), consumer credit (N527.65 billion), oil & gas (N477.65 billion), agriculture (N287.11 billion) and construction (N270.97 billion),” he said in his statement.

Finance experts noted that the trending loans granted by banks tend to increase Non-Performing Loans (NPL).

However, a recent Meristem report s forecasted further deterioration of asset quality by banks operating in the country.

A further deterioration in asset quality is likely to occur, particularly for vulnerable sectors like Oil and Gas, Manufacturing and Agriculture. This may however be mitigated by the planned restructuring of33per cent of industry loans, the report highlights.

Despite the headwinds expected, the CBN appears satisfied with 6.1 per cent level of NPL ratios as highlighted in its September monetary policy communique.

A member of the MPC, Dr. Aliyu Sanusi, Associate Professor, Ahmadu Bello University, Zaria, in his personal statement said, “A review of the Banking System reveals that the industry continues to be stable and the NPL continues to decline.

“Between end-May 2019 and end-August 2020, the total credit to the economy has increased by N3.766 trillion, or 20.43per cent, due to the CBN’s LDR policy which encouraged banks to lend,” he said.