Will the CBN’s recent efforts spur real sector credit?

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In an effort to spur real sector credit and ultimately achieve faster growth, lower inflation rate, job creation, and a stable exchange rate, the Central Bank of Nigeria (CBN) has been tough on banks lately.

Banks have refused to embrace prior efforts of the CBN, via the Real Sector Support Facility (RSSF), which appealed to them to lend to select sector at a single-digit interest rate.

Thus, recent regulation is more forceful. By recent guidelines, Banks risk losing more deposits to CBN’s required reserve (CRR) if they fail to meet a minimum Loan/Deposit ratio (L/D) of 60.0% by Sept-19. Again, deposit money banks (DMBs) cannot place more than N2.0bn (vs. N7.5bn previously) at the Apex bank’s Standard Deposit Facility (SDF). Hence, the banks must lend!

Evidently, Tier-1 banks, which are more liquid and better capitalized, appear to be the key target as the average L/D ratio for smaller banks stood above 60.0% as at Q1-19. While the CBN is getting frustrated with the DMBS, Banks are wary of their risk profile. Average Non-Performing Loan Ratios (NPLs) remained above 10% in Q1-19.

Going forward, though DMBs are likely to put more effort into credit origination, reduction in the deposit rate to check deposit growth is more likely. Majorly, macroeconomic vulnerability is the major concern for banks amid elevated NPLs.


United Capital Research