By Nkiruka Nnorom
The Deposit Money Banks have raised their credit exposure to the capital market and insurance sectors in an increased effort to meet the Central Bank of Nigeria (CBN) new lending policy.
The apex bank had in June this year directed banks to maintain 60 percent Loan-to-deposit ratio with September 30, 2019 as deadline. The CBN further raised the lending requirement to 65 percent and set December 31 deadline for compliance. The benchmark has, again, been raised to 70 percent.
Available data shows that credit to both sectors rose to N1.11 trillion in the third quarter (Q3) ended September 30, 2019, indicating an increase of 3.7 percent over N1.07 trillion allocated to the sectors in Q3 2018.
This was, however, a slowdown compared to the second quarter (Q2) ended June 30, 2019 when N1.13 trillion was allocated as credit to the capital market and insurance sectors, thus representing 14.1 percent year-on-year growth over N991.22 billion allocated to both sectors in Q2’18.
Investment analysts opined that the decline in credit allocation during the period is not unconnected with preparation for the yuletide period when investors sell-off their securities as well as the general lull in the market.
Further analysis shows that the allocation to the capital market and insurance sectors accounted for 6.82 percent of total banks’ credit in Q3’19 and 7.48 percent of banks’ loans to the private sector in Q3’18.
Though a decline of 1.5 percent Quarter-on-Quarter (Q/Q) compared to N1.13 trillion credit allocated to both sectors in Q2’19, but total credit to both sectors had recorded a marginal increase of 0.9 percent to N1.13 trillion in Q2’19 from N1.12 trillion in Q1’19.
Toyin Sanni, Managing Director/CEO, Emerging Capital Group, a Lagos-based investment banking firm, explained that the CBN’s circular to banks to maintain a minimum Loan-to-Deposit Ratio (LDR) of 60 percent before September 30, 2019 had led to growth in banks’ loan books.
According to her, nearly all sectors were positively impacted as a result of the action.
“Indexing it to insurance and capital market, further growth in these two sectors might be due to the nature of instruments traded – usually cash and near cash instruments. Expected reforms in the insurance sector could also be attracting increased interest,” Sanni said.
Some operators had said that banks are gradually restoring consumer lending in a bid to beat the December deadline.
According to Mr. Johnson Chukwu, Managing Director/CEO, Cowry Asset Management, the banks have been developing competencies and expanding their risk criteria as well as their target market to meet the fresh LDR requirement.
“I believe they are expanding the threshold they can lend and they are developing competencies to know the risks to stay away from.
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“Today, the banks are, actually, seeking new credible customers; the banks are gradually restoring consumer lending and as they expand these lending options, they will eventually meet the minimum LDR,” Chukwu said.