Why CBN may sanction some banks over new lending policy

The Central Bank of Nigeria (CBN) may sanction not less than seven banks, should they fail to comply with its new lending policy.

The banks which may be intensifying efforts to avoid being sanctioned by the apex bank are Guaranty Trust Bank, Zenith Bank, First Bank of Nigeria (FBN), Ecobank Transnational Incorporated, Stanbic IBTC Holdings, Union Bank of Nigeria Plc, and United Bank for Africa Plc (UBA).

Why the banks may be sanctioned: The affected banks’ financial report for 2019 Q1, shows that the banks recorded 51.6% Loan to Deposit Ratio (LDR), which represents 8.4% shortfall of the LDR target.

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It was however gathered that the banks’ deposit stood at N20.12 trillion during the period under review, as they disbursed N10.4 trillion loans to their customers. Under the new policy, they would be required to disburse N12.1trillion loans.

Consequence: In view of the new policy that will be implemented in about two months’ time, the seven banks would have no choice but to increase their loan position with as much as N1.7 trillion, which represents the LDR shortfall recorded by the banks as at the end of March 2019.

Should the banks fail to create a window for the outflow of the credit facilities as at the given period, CBN may enforce a sanction of locking up half of the amount, which is about N844 billion.

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Prior to this development, the apex bank had made known that its directive for DMBs to lend out a minimum of 60% of their deposits to the country’s real sector, will take effect from Monday, September 30, 2019.

Understanding the LDR: LDR is an instrument deployed to assess a bank’s liquidity by comparing its total loans to its total deposits for the same period. In this process, if the ration appears too high, it means that the bank may not have enough liquidity to cover any unforeseen fund requirements, especially if the loan repayments fall short of schedule. Conversely, if the ratio is too low, the bank may not be earning as much as it can from the deposits it had taken at a cost.