BANKS are rejecting high interest-yielding deposits as they countdown to the Central Bank of Nigeria (CBN) policy mandating them to give out at least 60 per cent of their deposits as loans or be sanctioned.
The CBN had announced pro-growth measures, such as requiring banks to report loan-to-deposit ratios of 60 per cent in a bid to make them lend more money to boost the local economy.
The policy implementation, which takes effect on September 30, has presented two options to the banks, Director, Investment Banking at Coronation Merchant Bank Limited, Abiodun Sanusi said.
Speaking on the options before the banks and the economy, Sanusi said the strategy adopted by each bank depends on its business decision.
He said a bank can either reject costly deposits from institutional investors or increase their loan positions.
Sanusi said: “There are two stands; one of them is, if I am falling short of the loan to deposit ratio which most banks are, I would increase my loans by converting my positions of investments in treasury bills and bonds to high risk or loans to private sector. This, he said, could raise the non-performing loans.”
He said banks that are happy with their risk asset positions and not keen on lending more are already shedding deposits.
This, they are doing by cutting deposit rates they give to institutional investors, pensions and the likes. However, the affected banks are not able to control retail savers who demand little or nothing in interest and have to save their money.
He said: “The other strategy is if I am happy with my risk asset and I do not want to increase it, I would shed my deposit. We have started seeing it. Some of the banks have started shedding their deposits by reducing the deposit rates they give to institutional investors, the pensions and the likes.
“However, they cannot control the retail deposit because the citizens need to keep their money in the bank, but deposits from treasury bills, institutional investors, corporates the banks can reject it.”
Treasury bills yields remained pressured as average yield across tenors dipped further by 51 basis points week-on-week to settle at 13.3 per cent on Friday from 13.8 per cent the previous week.
According to Sanusi, the strategy adopted by each bank differs.
“So, it is neither here nor there depending on the stand the bank takes. You can increase your risk asset which can likely increase your non-performing loan ratio. But that may not happen if you start lending to good sectors or creating assets that are good,” he said.
Continuing, he said that a bank that is skeptical of its risk, can reduce its deposits and still maintain the required loan to deposit ratio.
“But the overall impact is that banks want to give out more loans due to this policy, whether you want to do option one or two.” he added.
Sanusi said the banking sector has started seeing instances whereby companies that are struggling to pay back their loans have started restructuring their loans because the banks want to keep the loans rather than write them off which is good for the economy.
He said: “A lot of manufacturing companies suffered interest rates at 23 per cent before the end of recession. That affected a lot of the profitability and capability to payback their loans and default rate increased. With this policy, banks have started to create a restructuring and a longer term loan that those businesses deserve.
“So, overall, there is a huge positive gain in this 60 per cent loan to deposit ratio which means more loans would be given and also banks are now tenuring the loans from maturity to longer times.”
On the economy, he said that election years are usually slow with a lot of focus will be given to the political landscape, rather than the economy.
He said the population growth of Nigeria is three per cent per annum adding that any growth below three per cent means the economy is decelerating on a per capital income bases.
“Although we are growing but we are not growing as fast as our population growth which is what we have witnessed in the past two years. What it means is that government policies have not fully impacted on the economy but we are seeing a lot of progress being made now that the government has settled in,” he said.
He said the CBN needs to keep that large volume of dollars. This it does by offering attractive interest rate to investors on a risk adjusted bases which is what CBN is trying to do.
Sanusi said: “Once you have a high interest rate regime at the risk free level, it affects the entire economy because the bank buys their credit based on what the risk free rate is. If it is 15 per cent, definitely they would lend to corporates higher than that because of the credit risk premium they need to get for extending credit to the corporate sector which is why it has been challenging for the banks to lend at a single digit rate.
“However, I also understand the challenges of the CBN as it needs to ensure it maintains the stability of the foreign currencies.
“So, it has to be a collective effort with the government playing their part effectively without interfering in the private sectors transactions.
“We need to diversify our economy which means both the private sector and government need to implement policies that would reduce our consumption of importable products so that we demand less foreign currencies. We need to focus on boosting our production rate.”
Practical Considerations to Negotiate an Enforceable Joint Operating Agreement in Civil Law Jurisdictions (Netherlands: Kluwer Law International, 2020) By Professor Damilola S. Olawuyi, LL. B (1st Class), BL (1st Class), LL.M (Calgary), LL.M (Harvard), DPhil (Oxford), Professor of Law and Deputy Vice-Chancellor, Afe Babalola University, Ado Ekiti, Nigeria, www.damilolaolawuyi.com. & Professor Eduardo G. Pereira, LL. B (Brazil), LL.M (Aberdeen), PhD (Aberdeen),www.eduardogpereira.com
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