The Central Bank of Nigeria (CBN ) had began to force banks to loan more in 2019, threatening to sanction banks that fail to meet its stipulated 65% LDR. Banks face the possibility of a levy or additional cash Reserve Requirement (CCR) equal to 50% of the lending shortfall of the target.
Banks cash base are debited by the CBN through the CCR, and a sanction would further weaken Nigerian banks capital base, hence, the drive among banks to lend more to Nigeria’s economy, especially the Real sector.
The more credit issued by banks, the higher the risk of recording Non-performing loans (NPLs). The LDR policy by the CBN has triggered an increase in bad loan recorded by Nigerian banks, as CBN reported NPLs rose to 6.01% at end-December 2020 from 5.88% at end-November 2020.
This is above the prudential maximum threshold of the CBN, which is 5%. The increase in bad debts was caused by diminished revenue of the private sector which was as a result of global economy lockdown forced by COVID-19 pandemic.
This has further impacted the capital base of the banks, as money loaned out haven’t been serviced. Non-performing loan in the banking industry is pegged at N1.17 trillion by the Nigerian Bureau of Statistics (NBS) as at the third quarter of 2020, while loans to the economy is about N25.02 trillion.
The major beneficiaries of bank loans are Manufacturing, General Commerce, Agric and Forestry, Construction, ICT, amongst many others. It was gathered that General Commerce and manufacturing accounted for some of the highest bank credit.
According to the CBN, in its Monetary Policy Committee communique, on the rising NPLs, the “development is not unexpected under the prevailing circumstances.” Despite the risk faced by banks, the CBN hasn’t reduced the requirement of the LDR.
In the MPC note obtained from the CBN, the apex bank stated that the banking system remain stable, arguing that despite the NPLs rising above its threshold, banks still have a reasonably low level of NPLs.
“The Committee commended the Bank for maintaining a sound regulatory surveillance over the banking system by ensuring a reasonably low level of non-performing loans (NPLs), even with the aggressive credit expansion programme during this crisis period.
“Though, NPLs remained slightly above the prudential benchmark, members noted that the banking system remained stable, strong and resilient”, adding that, “Given the success recorded under the LDR policy, it thus urged the Bank to sustain its risk surveillance approach and ensure the continued soundness of the banking system.”