Looking at the ideal LDR which is 80-90%, and with the CBN LDR policy of 60-65% now, of what effects are these variances to the Nigeria economy? And what could have been the cause of this?
The CBN recently mandated all commercial banks to maintain atleast 60% of loan to deposit ratio by September 2019 and a strict requirements to lend well to the real sector of the Economy. Now in October, they have also increased the Minimum LDR to 65% of deposit which all banks is expected to achieve by December 2019.
Some people begins to wonder why CBN is trying to impose this on banks considering that they are trying to reduce the percentage (level) of Non performing Loan (NPL). The issue is that CBN has seen that most banks are trying to avoid one of their main primary responsibilities (giving credit) and are prioritizing other form of investments which they believe is more secure.
Most banks now prefer to put their money in Treasury bills (most secure and liquid investment) and government bonds as against lending it to businesses (risky).
The effect of this action by banks is that
1. Impedes on Economic growth
2. Businesses are affected
3. Investment is crumbled and which has a toll on Economic growth.
4. Small businesses cannot survive.
5. High interest rate to borrowers.
Advantage of the new CBN Regulations
1. Banks are willing to lend to small scale business
2. Improved Economic growth
3. Increase in Investment
4. Bank's will be concern with their primary responsibilities (Deposit and Lending)
5. Reduction in interest rate as Banks need to encourage borrowers to lend money in order for them to meet up with the directive
First of all, the idle LDR prior to now use to be 70% before the CBN mandated DMBs to make their LDR be at 60%. Now it has been increased to 65%.
The major reason for the policy is that banks no longer issue loans to SMEs/informal sector which contributes about 60% to the entire economy. Instead, they prefer putting their money into Treasury bills because it is less risky. For instance, Zenith Bank invested 1 trillion naira in treasury bills alone in 2018 which is more than the total asset of Wema Bank during the same period. What this means is that as a result of preferring to invest money into t-bills, banks have already reduced their risk of lending to SMEs who are not sure of paying back their debts. So the CBN decided to come up with that policy so that banks will reduce their investment in t-bills and begin lending money to those that need it.
The likely effect of this is that since the ease and cost of doing business in the country is still very high, then there is high probability of businesses failing to meet their loan obligations, thereby increasing the Non performing loans of banks.
On the flip side, the policy will actually help the economy in terms of spurring investments in the country due to the fact that businesses will now have access to loans from banks.
The pressure is now on banks to meet this new directives and as such they need to start persuading people to borrow from them.
This can be evident as some banks like Gtbank has started offering low interest loans to customers. Gtbank now has loan with interest as low as 1.75% monthly (21% per annum).
Most banks now have platforms that makes getting loan easier for their customers like using USSD, mobile apps and some banks even call Pre-qualified customers for loan.
Pressure is now on banks to lend to people and as a result of this, people will not borrow if the interest is too high for them, this will make bank's to reduce the rate they charge on their loan if they are to meet this target.
This can better be explained with the concept of demand and supply.
At this point the supply of loan is now greater than the demand for loan. Hence, it is expected that the price of loan (Interest) will come down (reduce)
I'm not sure interest rate wil reduce. What will only happen is for banks to restructure their rates such that it looks attractive on a first look. But when you compound it annually, it is still the same as before.
The CBN recently mandated all commercial banks to maintain atleast 60% of loan to deposit ratio by September 2019 and a strict requirements to lend well to the real sector of the Economy. Now in October, they have also increased the Minimum LDR to 65% of deposit which all banks is expected to achieve by December 2019.
Some people begins to wonder why CBN is trying to impose this on banks considering that they are trying to reduce the percentage (level) of Non performing Loan (NPL). The issue is that CBN has seen that most banks are trying to avoid one of their main primary responsibilities (giving credit) and are prioritizing other form of investments which they believe is more secure.
Most banks now prefer to put their money in Treasury bills (most secure and liquid investment) and government bonds as against lending it to businesses (risky).
The effect of this action by banks is that
1. Impedes on Economic growth
2. Businesses are affected
3. Investment is crumbled and which has a toll on Economic growth.
4. Small businesses cannot survive.
5. High interest rate to borrowers.
Advantage of the new CBN Regulations
1. Banks are willing to lend to small scale business
2. Improved Economic growth
3. Increase in Investment
4. Bank's will be concern with their primary responsibilities (Deposit and Lending)
5. Reduction in interest rate as Banks need to encourage borrowers to lend money in order for them to meet up with the directive
Reduce interest rate!!!! How? Kindly expatiate
First of all, the idle LDR prior to now use to be 70% before the CBN mandated DMBs to make their LDR be at 60%. Now it has been increased to 65%.
The major reason for the policy is that banks no longer issue loans to SMEs/informal sector which contributes about 60% to the entire economy. Instead, they prefer putting their money into Treasury bills because it is less risky. For instance, Zenith Bank invested 1 trillion naira in treasury bills alone in 2018 which is more than the total asset of Wema Bank during the same period. What this means is that as a result of preferring to invest money into t-bills, banks have already reduced their risk of lending to SMEs who are not sure of paying back their debts. So the CBN decided to come up with that policy so that banks will reduce their investment in t-bills and begin lending money to those that need it.
The likely effect of this is that since the ease and cost of doing business in the country is still very high, then there is high probability of businesses failing to meet their loan obligations, thereby increasing the Non performing loans of banks.
On the flip side, the policy will actually help the economy in terms of spurring investments in the country due to the fact that businesses will now have access to loans from banks.
On how this will reduce the interest rate.
The pressure is now on banks to meet this new directives and as such they need to start persuading people to borrow from them.
This can be evident as some banks like Gtbank has started offering low interest loans to customers. Gtbank now has loan with interest as low as 1.75% monthly (21% per annum).
Most banks now have platforms that makes getting loan easier for their customers like using USSD, mobile apps and some banks even call Pre-qualified customers for loan.
Pressure is now on banks to lend to people and as a result of this, people will not borrow if the interest is too high for them, this will make bank's to reduce the rate they charge on their loan if they are to meet this target.
This can better be explained with the concept of demand and supply.
At this point the supply of loan is now greater than the demand for loan. Hence, it is expected that the price of loan (Interest) will come down (reduce)
Ask question for more clarification
I'm not sure interest rate wil reduce. What will only happen is for banks to restructure their rates such that it looks attractive on a first look. But when you compound it annually, it is still the same as before.
No, the interest rate banks charge on Loan is higher than 21% per annum. Most bank charge as high as 44% per annum.