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COVID-19: CBN driving credit growth amid crisis

Measures introduced by the Central Bank of Nigeria (CBN) to boost credit growth continue to yield desired results despite the devastating impact of the coronavirus (covid-19) crisis, writes Tony Chukwunyem

The communiqués issued by the Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) at the end of all its meetings, so far, this year, clearly show that members of the committee fully support measures introduced by the apex bank to boost deposit money banks’ (DMBs) lending to the real sector of the economy. Specifically, members of the committee have urged the CBN to sustain its Loan to Deposit Ratio (LDR) policy and to also continue with its Covid-19 palliative measures. For instance, the communiqué issued at the end of the CBN’s Monetary Policy Committee (MPC) meeting in March, said: “The Committee noted with satisfaction the growth in aggregate credit by N2.35 trillion since the inception of the LDR policy, reflecting the potency of the policy and thus urged the Management of the Bank to sustain the current momentum of improved flow of credit to the private sector in Nigeria.”

Pandemic crisis

Even when the coronavirus spread to these parts in February and the CBN had to quickly announce a combined stimulus package of about N3.5 trillion in March, in targeted measures, to households, businesses, manufacturers and healthcare providers, to help the economy cope with the impact of the pandemic, thus fuelling speculation of a possible spike in banks’ non-performing loans (NPLs), the MPC members still backed the regulator’s credit growth policies. As the communiqué issued by the MPC at the end of its May meeting put it, “the committee noted the stability in the banking system shown by the increase in total asset by 18.8 per cent and total deposits by 25.52 per cent (yearon- year).

The performance of the Loan-to-Deposit Ratio (LDR) policy, which was introduced in July 2019, showed that total credits increased by N3.1 trillion or 20.45 per cent, with manufacturing, retail & consumer loans, general commerce and agriculture as major beneficiaries.

“The committee recognised that under the N100 billion Healthcare Sector Intervention Fund, the bank has approved and disbursed N10.15 billion for some projects for the establishment of advanced diagnostic and health centres and the expansion of some pharmaceutical plants for essential drugs and intravenous fluids. “As part of the N1trillion intervention targeted at agriculture and manufacturing firms, the bank has disbursed N93.2bn under the Real Sector Support Fund to boost local manufacturing and production across critical sectors. This consists of over 44 greenfield and brownfield projects. “The bank has also approved N10.9 billion to 14,331 beneficiaries under the N50 billion Targeted Credit Facility for households and SME’s, out of which N4.1billion has been disbursed to 5,868 successful beneficiaries.

The committee directed management to reach out to the banks to encourage them to offer and disburse these funds to those priority sectors of the economy so as to stimulate aggregate demand and create more jobs.” Similarly, the communiqué issued by the MPC at the end of its meeting last month, states: “The committee commended the CBN Loan-to Deposit Ratio (initiative to address the credit conundrum as the total gross credit increased by N3.33 trillion from N15.56 trillion at end-May 2019 to N18.90 trillion at end-June 2020.

These credits were largely recorded in manufacturing, consumer credit, general commerce, and information and communication and agriculture, which are productive sectors of the economy.” According to the communiqué, the MPC specifically expressed optimism on the future impact of Covid- 19 on the N50 billion Household and SME facility, out of which, N49.195 billion had been disbursed, to over 92,000 beneficiaries.

It also noted that under the N100 billion healthcare and N1.0 trillion manufacturing and agricultural interventions to support the rebound in growth from the impacts of the pandemic on the economy, the CBN had disbursed over N152.9 billion to the manufacturing sector to finance 61 manufacturing projects and another N93.6 billion to the Healthcare sector, amongst many other sector-specific facilities.

Committee members’

views Indeed, personal statements of MPC members at the meeting in July, which were released last week, reflect their strong belief in the effectiveness of the CBN’s intervention measures. Thus, in his statement, the Deputy Governor, Corporate Services Directorate at the CBN, Mr. Edward Adamu, noted that the CBN’s measures were boosting credit growth despite the Covid-19 crisis. He stated: “The bank’s interventions in the real sector have remained robust and well-tailored to deliver speed in employment elastic sectors including agriculture,manufacturing and solid minerals.

“It is gratifying to note that the economy has received and continues to receive substantially higher amounts of credit compared with periods of similar crisis in the past. Between June 2019 and June 2020, total credit rose by N3.46 trillion (about 22 per cent), of which new credit in June 2020 alone accounted for N773 billion, up from N412.7 billion in May 2020. The number of new credits (recipients) similarly rose by about 42,000 to 93,578 from 51,700 in May.” Continuing, he said: “The huge credit output in the economy was underpinned by improved resilience of the banking system.

As at end-Q2, most Financial Soundness Indicators (FSIs) performed well relative to regulatory benchmarks. In spite of macroeconomic challenges, banking industry tier one capital accounted for 87.22 per cent of the total qualifying capital at end-June 2020; capital adequacy ratio (CAR) stood at 14.96 per cent with nonperforming loans (NPLs) ratio of 6.4 per cent and provision ratio of 118.9 per cent. “The surge in new credit and its major destinations including agriculture and manufacturing in recent months, obviously lend credence to the efficacy of extant real sector support (policy) initiatives of the bank – the minimum loan-to- deposit ratio (LDR), the differentiated cash reserves requirement (DCRR) and the development finance interventions.”

Equally, in her personal statement, Deputy Governor, Financial Systems Stability Directorate, CBN, Mrs. Aishah Ahmad, said: Loan-to-Deposit Ratio (LDR), Global Standing Instruction, streamlining of access to Open Market Operations securities and other complementary measures have been strong tail winds, which have strengthened intermediation – via increased lending to the key sectors such as manufacturing, agriculture and consumer mar-kets (gross credit grew by an additional N300billion from N18.6 trillion to N18.9 trillion between end-April and end-June 2020, respectively) and lower market lending rates, which have insulated the financial system from the worst impact of the pandemic.

“These efforts are being supported by ongoing CBN interventions – the N50 billion household and SME facility, out of which N49.195 billion has been disbursed to over 92,000 beneficiaries, N100 billion healthcare and N1.0 trillion manufacturing and agricultural interventions alongside significant interventions in other growth enhancing sectors, with remarkable implementation success,” she added. Also, the Deputy Governor, Economic Policy Directorate, CBN, Dr. Kingsley Obiora, in his personal statement, said: “Net aggregate domestic credit grew by 5.16 percent in June 2020, compared to the previous month. Stimulated by the policy on Loanto- Deposit Ratio (LDR), the past year has seen total gross credit increase from N15.56 trillion at the end of May 2019 to N18.90 trillion at the end of June 2020. This has been driven especially by manufacturing, consumer credit, general commerce, information and communication, and agriculture.” Significantly, in their “NOVA Economic Outlook H2 2020” report, analysts at Nova Merchant Bank Research stated that “beyond doubt, the LDR policy has proven to be more potent in driving real sector lending and at the same time moderating the cost of borrowing due to the increased competition for corporate names.”

It will be recalled that as part of its measures to compel DMBs to increase lending to the real sector of the economy, the CBN had, on July 3 2019, ordered lenders to maintain a minimum LDR (portion of customers’ deposit that is given out as loans) of 60 per cent by September 30, 2019, stating that failure to comply with the directive will result in a levy of additional Cash Reserve Requirement (CRR) equal to 50 per cent of the lending shortfall of the target LDR. The apex bank, which had also stated that the LDR would be subject to quarterly review, subsequently raised the LDR target upwards to 65 per cent and directed lenders to comply by December 31, 2019.

Analysts point out that that the success of the LDR policy had proved global credit rating agencies, such as Fitch Ratings and Moody’s Investors Service, wrong. The agencies had warned at the time that the policy was introduced that it will be credit negative for Nigerian banks, as it would likely force them to turn on their lending tap to riskier borrowers, thereby putting their asset quality at risk.

Conclusion

Given that the global economy is still grappling with the coronavirus crisis, the consensus among financial analysts, at the weekend, was that the CBN should continue to drive credit growth as this would help shield the economy from the impact of the pandemic.

 

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