THE Central Bank of Nigeria (CBN) will from July 31 begin to enforce the 65 per cent loan-to-deposit ratio (LDR) policy on banks flouting its directive.

The policy was set to improve lending to customers in order to stimulate the real sector of the economy.

It implies that for every N100 received as deposits, the banks are to lend N65 to customers.

According to a ThisDay report, the apex bank had in a circular to banks stated that it would resume the enforcement of the LDR policy effective July 31, 2023.

The move followed CBN’s directive to banks to maintain a minimum LDR of 65 per cent, after the apex bank had in October 2019, raised the LDR from 60 per cent.

Checks by The ICIR showed that in the last three years, most banks had failed to meet the CBN 65 per cent minimum loan requirement to customers.

The apex bank, urging commercial banks to comply, stated in the circular that the resumption of enforcement was in line with the objective of the policy and the need to moderate industry excess liquidity.

Banks with LDR below the minimum requirement as of the date – and monthly thereafter –  would be liable to a Cash Reserve Requirement (CRR) surcharge of up to 50 per cent of the lending shortfall, the CBN warned.

Banks currently maintain 32.5 per cent CRR with CBN, which represents a specified minimum fraction of the total deposits of customers.

The LDR is used to assess a bank’s liquidity by comparing total loans to deposits for the same period, which impacts both liquidity and solvency in the short, medium and long term.

Liquidity and profitability are two required methods of credit creation that lubricate banks’ ability to generate loans, a finance lecturer, Abu Noruwa, said.

“First, the banks must maintain certain reserves from their total demand deposits to pay for the cash demands of their depositors.

“Second, the profitability of banks makes the credit cycle sustainable as it ensures banks are in a healthy position. At the same time, it indicates that banks are generating higher revenues from their interest earnings than what they are paying their customers on their demand deposits,” Noruwa, a lecturer at the Department of Finance, University of Lagos, explained.

Banks flouting CBN’s LDR policy

Checks by The ICIR on three-year financial statements of some banks showed that most of the banks had defiled the 65 per cent LDR policy.

The banks are FBN Holdings (FBNH), United Bank for Africa (UBA), Guaranty Trust Holding Company (GTCO), Zenith Bank, Access Holdings, FCMB Group, and Fidelity Bank.

It showed that FBNH total loans – loans and advances to customers plus loans and advances to banks – in 2020 stood at N3.61 trillion, while its total deposits – deposits from customers plus deposits from banks – stood at N6.55 trillion, representing about 55 per cent LDR.

In 2021, FBNH’s loans stood at N4.45 trillion and deposits at N8.65 trillion, as LDR fell to about 51 per cent. Also, in 2022, LDR fell to about 49 per cent as the bank reported N5.56 trillion loans and N11.26 trillion deposits.

In the three-year period under review, UBA reported N2.63 trillion, N2.83 trillion and N3.44 trillion total loans, and N6.09 trillion, N7.02 trillion and N8.99 trillion deposits in 2020, 2021 and 2022 respectively.

Following from the figures, the bank’s LDR, which was about 43 per cent in 2022, fell to 40 per cent and 38 per cent in 2021 and 2022 respectively.

GTCO reported N1.66 trillion, N1.8 trillion and N1.89 trillion total loans in 2020, 2021 and 2022, while its total deposits stood at N3.61 trillion, N4.13 trillion and N4.61 trillion in that order.

The bank’s LDR also dropped from about 46 per cent in 2020 to 44 per cent in 2021, and 41 per cent in 2022.

Zenith Bank’s total loans was N2.78 trillion in 2020, N3.36 trillion in 2021, and N4.01 trillion in 2022, while total deposits was N5.34 trillion, N6.47 trillion and N8.98 trillion respectively. The bank’s LDR also dropped from about 52 per cent in 2020 to 51.85 per cent in 2021 and 45 per cent in 2022.

Access Holdings’ total loans in 2020 was N3.61 trillion, and N4.45 trillion and N5.56 trillion in 2021 and 2022, while its total deposits were N6.55 trillion, N8.65 trillion and N11.26 trillion respectively.

The bank’s LDR also fell from about 55 per cent in 2020 to 51 per cent in 2021, and 49 per cent in 2022.

FCMB reported N822.77 billion total loans in 2020, N1.06 trillion in 2021, and N1.19 trillion in 2022. Its total deposits were N1.38 trillion, N1.72 trillion and N2.07 trillion respectively. The bank’s LDR, which was about 60 per cent in 2022, rose to 62 per cent in 2021, and later dropped to 58 per cent in 2022.

While these banks failed to meet the CBN 65 per cent mandatory LDR in the three-year period under review, Fidelity Bank, however, surpassed the minimum requirement.

The ICIR analysis of the bank’s financial statements showed that Fidelity Bank’s total loans stood at N1.33 trillion in 2020, N1.66 trillion in 2021, and N2.12 trillion in 2022. Total deposits stood at N1.699 trillion, N2.02 trillion and N2.58 trillion in those respective years.

Following from the figures, the bank’s LDR rose from about 78 per cent in 2020 to 81.9 per cent in 2021 and 82 per cent in 2022.

Impacts on banks, businesses and the economy

The need to measure the impact of LDR on banks’ liquidity to ensure the achievement of the CBN mandate cannot be overstretched as it helps to promote a sound financial system without compromising the health of the domestic banks.

According to the CBN, the justification for the LDR policy was to encourage banks to enhance credit delivery to the real sector of the economy.

Noruwa explained that as money plays multiple roles, raising credit (LDR) allows an economy to achieve growth and development through more consumption, increasing demand, greater investment and increase in employment and economic activities.

“It also enables efficient monetary policy to stabilise the economy along with a mandatory reserve system, to mitigate inflation, and to make credit available to poorer sections of the society leading to inclusive growth, and for a wider access to consumer goods and investment opportunities,” he highlighted.

“However, it will affect banks’ operations because a very high LDR will limit credit creation by banks. Also, because deposits form the basis for credit creation, a bank with a low base of deposits will generate less credit.

“As to investment, people who do not have potential security as collateral cannot be availed credit,” the lecturer pointed out.

While the CBN placed an incentive of 150 per cent to encourage banks to meet the LDR requirement, it warned that failure to achieve the target attracts a levy of additional CRR of 50 per cent of the lending shortfall.

It, however, advised banks to maintain strong risk management practices regarding their lending operations.

An ideal situation

Dataphyte, a media research and data analytics organisation, revealed that many of the commercial banks in the country are lending below the minimum ratio.

Explaining the LDR concept, it said high ratio means a bank might have little cash to meet unforeseen demands, while a low ratio may mean low earnings.

A LDR of 80 per cent to 90 per cent is ideal for a bank to ensure profitability and meet customers’ demands, Dataphyte noted.

According to the research firm, at the end of 2019, 2020 and 2021, LDR achievements were 62.87 per cent, 59.37 per cent, and 62.17 per cent respectively.

Although the ideal ratio is between 80 per cent and 90 per cent, it varies from country to country.

In South Africa, the minimum ratio is 91 per cent, 70 per cent in Brazil, 75 per cent in India, and 76 per cent in Kenya, Dataphyte stated.

A high LDR shows bank’s ability to attract customers, increases profitability and attracts more investors.