How increased loan deposit ratio will revive ailing SMEs

Central Bank of Nigeria (CBN) recently increased banking sector Loan Deposit Ratio (LDR) to 65 per cent to boost lending to the SMEs.  In this report AMAKA IFEAKANDU looks at the implications of the policy on the sector and the entire economy.

The  Central Bank of Nigeria (CBN’s) recent policy on the increase in banking sector Loan to Deposit Ratio (LDR) has continued to raise dust in the nation’s financial system.

To encourage lending

The policy was not only designed to encourage lending to the Small and Medium scale Enterprises (SMEs) to increase productivity, it is expected to create job opportunities to reduce high rate of unemployment in the economy.

The move was also set to facilitate more investments into the country’s real sector and economy, while also building a resilient financial system.

This is because over the years, business owners, especially small and medium scale enterprises, have constantly complained about the inability to access funds for expansion and business development.

Challenges of business owners

Data from Manufacturers Association of Nigeria (MAN) also shows that the lending rate to the manufacturing sector was 22.21 per cent in 2018.

The Manufacturers CEO’s Confidence Index (MCCI) report released by the Manufacturers Association of Nigeria (MAN) for the second quarter of 2019 which represented the view of about 400 CEOs of MAN member-companies across the country expressed the challenges of business owners regarding funding.

The report also states that the issue of funding has been a constant problem for manufacturers who need it for business expansion, improved productivity, procurement of raw materials and business development purposes.

Rate of lending to manufacturers discouraging

It highlighted that 76 percent of the CEOs interviewed said the rate at which commercial banks lend to manufacturers discouraged productivity in the sector, while 66 percent of the CEOs claimed that the size of loans allotted to industry players by commercial lenders further contributes to low productivity in the sector and also discourages foreign and local investments.

Although some financial operators see the CBN new policy on LDR as step  to end the problem of funding which is the major challenge limiting MSMEs growth in the country, others said that such directive is likely to mount pressure on banks loan books.

Operators supportive argument steamed from the fact that most of the intervention policy introduced by the CBN in the last five years have helped to some extent to stimulate economic growth in those sectors and they believed that  increase in LDR would not be an exception.

For instance the CBN anchor borrower in agricultural sector has helped to boost rice production while the apex bank intervention in Agro Allied industries offered an opportunity for  Psaltry International Limited (PIL) located at Alayide Village, Ado-Awoye Iseyin Local Government of Oyo State to increase and diversified its production in cassava starch food processing.

Starch production

The company was also able to acquire large farm as a back up in its high quality food grade starch production peradventure there is scarcity of cassava supply.

However, apart from funding, the problem of infrastructural facilities in the country on the contrary, affect  expansion policy as most of these companies had to battle with provision of roads, energy, water if they actually  want to remain in business.

Motorable roads

The Managing Director of PIL, Mrs Yemisi Iranloye told financial journalists during a visit to the factory that her company had to provide motorable roads to her farm, electricity and drinkable boreholes for the community and her workers to ensure unterupted  production.

Commenting on the CBN LDR policy, a financial analyst, Mr Ifeanyi Okpala held strong view that lending to Small and Medium Scale Enterprises (SMEs) would  increase productivity if the fund borrowed are channel for production.

He said that steady lending to SMEs, would not only reduce unemployment in the country but would lead to the growth of the nation’s economy because such funds would stimulate activities in the system.

Highest employers of labour

In his explanation, he said “whether we like it or not SMEs are the highest employers of labour in the country and extending credit facilities to them is like giving them more opportunity to expand their production and expansion of any business always go with employment of new workers in any organisation.”

He said if local industries have access to fund with good infrastructural facilities in place, they would be able to produce quality goods at cheaper rate to be able to compete in the international market.

He however  pointed out that the bankers committee policy that banks have right to recover their loans from  any of the borrowers account irrespective of where the account domicile  has taking away the risk of non repayment of credit facilities in the country.

Infrastructural facilities deficits

He said that no matter how successful the company would be, the problem of power, roads and other infrastructural facilities would continue to mount pressure on the company over head cost.

National president, Association of Small Business Owners of Nigeria (ASBON), Femi Egbesola  said. “Lack of adequate finance has been the major challenge limiting MSMEs growth in the country. With the CBN’s compulsion on banks to lend more will oil MSMEs – which is the engine of growth,”

“The problem with the directive is for the banks to comply.”

He stated that if the banks comply with the policy, lots of ailing businesses in the country will spring back to life to create employment.

Jerking LDR, a tough one

An economist, Mr Jide Lawanson described the increase in LDR to 65 per cent by CBN as a tough one, adding that it will give Nigerian banks sleepless night.

He said apart from the fact that the policy would put the banks loan books and assets quality under pressure , CBN can  debits Deposit money Bank accounts  immediately it observed any default without notification.

Contrary to other views, analysts from Cowry Assets Management Research group said that the apparent pressure on the Nigerian DMBs to increase lending could have a negative impact on the banks non-performing loans in the short term. The group feel that the banks ought to be given enough time to do their due dilligence before advancing creidit to customers given the infrastructural challenges faced by the real sector.

Forcing banks to lend to real sector

An economist who pleaded anonymity said the policy is an indication the CBN is trying to force the banks to lend to the real sector even when the real incentives are not there.

He said  the apex bank has refused to bring down the benchmark lending rate, thus making interest rate for bank loans to be high.

Explaining further he said “The banks that have taken the risks to lend to SMEs as directed by CBN  have huge non-performing loans to deal with and it is profit making institutions. That is why  most of the banks prefer investing in more secured fixed instruments where returns are guaranteed,”. He noted that, the directive is tough and tasking, adding that with the new policy, banks who fail to lend will have 50 percent of their excess liquidity quarantined into credit reserve ratio at zero interest rate.

Appreciable growth

The apex bank recently increased the minimum Loan to Deposit Ratio (LDR) of the Deposit Money Banks (DMBs) from 60 per cent to 65 per cent effective from December 31, 2019.

According to the regulator of the Deposit Money Banks, the increase in the LDR was engendered by the appreciable growth in the level of the industry gross credit, which increased by N829.40 billion or 5.33 per cent to N16.40 trillion in September 26, 2019

from N15.57 trillion in May 2019, following its earlier pronouncements on the initiative to drive real sector productivity.

The initiative aimed to encourage lending, especially to Small Medium Enterprises (SMEs), Retail customers and Mortgage customers which shall be assigned a weight of 150 per cent each in computing the stipulated LDR while CBN will provide a framework for the classification of businesses that fall under these categories.

The CBN reiterated that failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement (CRR) equal to 50 per cent  of the lending shortfall of the target LDR.

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