BANKS are cutting lending rates to woo more borrowers.
The measure is to raise profitability and to meet the 65 per cent Loan to Deposit Ratio (LDR) target set by the Central Bank of Nigeria (CBN).
They are relying more on lending to grow their profits as yields from government securities – Treasury Bills and Bonds – drop.
Besides, the apex bank has slashed non-interest income (commission and fees) seen as major revenue channels for banks.
Analysts at Afrinvest West Africa, an investment and research firm, said the lending rates are trending downwards, with many Tier-1 banks competing for profitable borrowers and cutting down rates.
Afrinvest West Africa Limited Group Managing Director Ike Chioke who spoke at the launch of the “Economic and Financial Markets 2020 Outlook” in Lagos, said the banking sector has given out N1.5 trillion as loans following the implementation of the LDR policy.
He said the CBN is likely to further raise the LDR to 70 per cent to boost lending to the private sector.
According to Chioke, lending rates to individuals have dropped from between 20 and 25 per cent to 15 per cent and below. It will continue to dip as banks compete for credible borrowers with ability and willingness to repay their loans.
The Afrinvest boss, increase in loans is a positive feedback in growing the economy, adding that Non Performing Loans (NPLs) rate will not rise until next year when most of the loans will be due for repayment.
The DMBs have been mandated by the CBN to give out 65 per cent of deposits as loans, threatening to raise Cash Reserve Ratios (CRR) of erring banks.
The CRR is the share of customers’ deposits that is kept with the central bank.
A macro-economist strategist at Afrinvest, Adedayo Bakare, said: “We expect that the NPLs will rise between 2021 and 2012, and the CBN is even trying to recapitalise the banks to enable them absorb the likely shock from the NPLs rise.
“As the banks do more lending, they are also aware that the risks are still very high, as much as possible. Still, some banks are not willing to take any form of risk due to their past experiences.”
According to him, the CBN will be monitoring the NPLs, and overtime, decide either to relax the policy or not. He said that power and mortgage sectors are likely to attract more loans as the policy reviews in those sectors give banks more confidence to lend.
“Yields from government securities are collapsing, and banks are really trying to expand the size of their books through increased loans. In terms of non-interest income, the CBN came out in the fourth quarter of last year and revised the Guide to Bank Charges, which meant that banks earn less from non-interest income (fees and commission)”, he added.
The industry LDR had stood at 80.1 per cent in 2016; 75.1 per cent in 2017 and 66.4 per cent in 2018 and has continued to trend downward as lenders cut their credit exposures, focusing on high-yielding government securities- Bonds and TBs.
Speaking on the LDR policy, Head, Currencies Market at Ecobank Nigeria, Olakunle Ezun, said the policy will stimulate lending to Small and Medium Enterprises (SME), retail, mortgage and consumer lending.
He explained that with the mandate to banks to maintain a minimum LDR of 65 per cent, the CBN plans to improve market liquidity and subsequently, encourage deposit money banks to increase lending to the productive sector of the economy.
The directive comes with additional incentive of a weight of 150 per cent to the preferred sectors in the computation of LDR.
Ezun said: “The CBN’s recent move could be positive, as we expect improved lending to the productive sector and reveals the risk appetite for the productive sectors of the economy.
“While the CBN’s reason for the policy is to encourage banks to lend to the productive sector, it is not clear how the apex bank intends to achieve this objective.
“Given internal risk framework of most bank and their disposition to increase lending to riskier borrowers, potentially with looser underwriting or underpricing outlook, the risk acceptance framework will have to come to play.
“While the liquidity in the market will rise, the liquidity could be locked up in a large portfolio of government securities in contrast to the overall objective of lending to the real sector.”
He explained that in the longer term, more stringent regulations can be positive for the economy but negative for the lending institution while stringent regulations can force bank to increase their risk appetite, which could lead to higher NPLs and further deteriorate the industry’s asset quality.