CBN Loan Policy Could Weaken Banks’ Asset Quality—IMF

By Modupe Gbadeyanka

The Central Bank of Nigeria (CBN) has been advised not to be too aggressive with banks in the country on its loan to deposit ratio policy, which it puts at 65 percent before the end of this year.

In July 2019, the central bank had directed banks to increase their LDR to 60 percent before September 30, 2019, threatening to punish any financial institution that fails to adhere.

This month, the apex bank slammed 12 banks with a fine of N499.2 billion for not meeting up with the 60 percent LDR and this caused banking equities at the stock market to fall on October 2, 2019.

The CBN had explained that it came up with this policy to boost lending to the real sector of the economy. Since the country went into recession in August 2019 and got out a year later, the economy has not fully recovered.

On Monday, the International Monetary Fund (IMF) concluded its staff visit to Nigeria and leader of the team, Mr Amine Mati, who is the Senior Resident Representative and Mission Chief for Nigeria, urged the apex bank to look into the matter carefully before being aggressive with it.

Mr Mati, in a statement on Tuesday, noted that the loan policy could have a huge negative impact on the banks, especially on their asset quality, prudential buffers and others.

However, the global lender noted that the prudential ratios of the Nigerian banking industry was recording an improvement, pointing out that consolidating the capital buffers of banks would prevent the sector against any external shock.

“Banking sector prudential ratios are improving. However, new regulations to spur lending—which has recently increased—should be carefully assessed and may need to be revisited in view of the potential unintended consequences on banks’ asset quality, maturity structure, prudential buffers and the inflation target. Continued strengthening of banks’ capital buffers would enhance banking sector resilience,” the IMF chief said in the statement obtained by Business Post.

While commenting on the economy, the IMF noted that the pace of recovery was still slow, but argued that lower food price has helped the headline inflation to moderate to its lowest level since January 2016.

However, the lender pointed out that, “The increasing CBN financing of the government reinforces the need for an ambitious revenue-based fiscal consolidation that should build on the initiatives laid out in the Strategic Revenue Growth Initiative.”

It suggested that, “A tight monetary policy should be maintained through more conventional tools. Managing vulnerabilities arising from large amounts of maturing CBN bills—including those held by non-residents—requires stopping direct central bank interventions, the introduction of longer-term government instruments to mop up excess liquidity and moving towards a uniform market-determined exchange rate.”

Modupe Gbadeyanka is a fast-rising journalist with Business Post Nigeria. Her passion for journalism is amazing. She is willing to learn more with a view to becoming one of the best pen-pushers in Nigeria. Her role models are the duo of CNN's Richard Quest and Christiane Amanpour.

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