Loan-To-Deposit Ratio: FDC Lists Three Options Open To Banks

AS the effective date of September 2019 given to Deposit Money Banks (DMBs) by the Central Bank of Nigeria (CBN) to raise Loans-to-deposit ratio (LDR) to 60 per cent approaches financial experts have suggested various options open to lenders.

In the latest edition of the Lagos Business School (LBS) Breakfast Session, Bismarck Rewane, Managing Director, Financial Derivatives Company (FDC) Limited and his team suggested that Banks have three options with attendant implications.

According to them, for the fact that higher non- performing loans (NPLs) and impairments weigh on balance sheet and profitability, banks have to be more careful in compliance.

The options open to the lenders are either to increase loan book by N1.5trillion and reduce deposits by N1.5 trillion which will weigh on income generation capacity.

Another option according to Rewane is to reduce gross earnings which implication would result to about N600 billion idle assets and increase in cost of funds, while the last option would of course be to “Do nothing.”

The CBN had earlier warned that non-compliance attracts a Cash Reserve Ratio (CRR) of 50 per cent over shortfall

This according to experts is a challenge given that DMBs LDR as at April 2019 stood at 55.5 per cent representing a gap of 4.5 per cent or N1.5trillion shortfall

Meanwhile, some rating agencies have offered explanations given their position on the new LDR. For instance Fitch Ratings rated the new LDR as credit negative for the Nigerian banking sector

According to Fitch, this means that banks are being pressured to increase lending to riskier borrowers, potentially with looser underwriting or under pricing of risk.

It further stated that there will be unlikely sufficient demand from good-quality borrowers, adding that time scale given to lenders is too short to achieve the new LDR at the current deposit growth rate. It further expressed concerns that key rating sensitivities could deteriorate due to fast loan growth.

For Moody’s Investors service, the new LDR will go a long way to stimulate consumer lending.

It will however tighten bank’s funding positions and remains credit negative for banks, forcing them to take out potentially riskier loans to meet new LDR.

Moodys further fears that it will lead to Increase in banks’ asset risk due to greater lending to borrowers categorized as too small or too risky.

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