In order to minimize the undesirable effects of the current policy, some modifications listed below can be considered:
Phased Implementation: Prior to now, the CBN had only provided a ceiling of 80% LDR for the banking industry, leaving banks with a lot of discretion as to the size of their loan books. However, the new policy now introduces a floor for LDR and as already pointed out by several analysts, it is expected to unlock over N1.5trillion new credit into the system between July & December 2019. Even if the economy can accommodate the additional injection, the creation of over N1.5trillion quality risk assets in just six months may be a tall order for banks. The CBN should consider a more realistic timeline for policy implementation.
[READ MORE: LDR: Growing the real sector by fiat? Part 1]
Employing Incentives as Against Penalty: Lending to the real sector is one issue where wielding the big stick seems out of place. In a free market, the choice of investment a firm opts to pursue (so long same is lawful and ethical) cannot be legislated. Rather, incentives and moral suasion should be employed. For example, the 150% weight (or any other appropriate weight) attached to SME lending can be made CRRdeductible to incentivize banks to lend to the sector. Alternatively, the weighting of SME lending can be reduced for CAR computations.
Clearer Policy Direction: The provisions of the new LDR policy allowing the CBN to review the LDR quarterly should be expunged. This is because same creates a blurry policy horizon and impedes the ability of banks to properly plan their affairs. More so, it may be difficult or impossible to rescind a decision made based on a given LDR when same changes the next quarter. At the minimum, the CBN can begin with annual LDR targets known to banks and be kept unchanged throughout the financial year.
The intention behind the LDR policy is laudable and justifiable given where we are as a nation. However, it can be implemented in a way that minimizes the downside effects enumerated above. On this road to getting the Nigerian economy back to full recovery and growth, the CBN needs willing chariots and not “unwilling horses” being forced to take a drink at the river.
The banks should also realize that the days of shying away from lending to the real sector are gone. The next phase of growth for the industry will only happen by throwing their hats into the ring and getting their hands dirty- no more free money! As such, it is in their best interest to strengthen their risk management processes, wholly embrace the Know Your Customer (KYC) regime and leverage technology to be better equipped to perform the role the Nigerian economy requires of them as such a time as this.
Tunde Adeyemi is a versatile banker with over twelve years of experience in the Nigerian banking industry. He is an Associate of The Chartered Institute of Bankers of Nigeria (CIBN), holds an MBA from the University of Lagos and also a certified PRINCE2 Practitioner in Project Management. He is a member of the Pioneer set of the FirstBank Management Associate Programme (FMAP), an elite 24-months leadership development programme aimed at identifying & grooming the next set of leaders for the iconic institution and the banking industry in general. He can be reached via email at firstname.lastname@example.org.