Thursday, 15 April, 2021

Increase in LDR and worry over toxic loans

There has been a renewed call for the diversification of the productive base of the economy from crude oil. This has brought agriculture and manufacturing into focus.

While there have been attempts to stimulate activities in these areas, getting the banks to increase credit to the sectors has been a major challenge. Hence, players in the sectors have identified access to credit as a major set back

But recent figures have shown that this narrative could change soon. A recent National Bureau of Statistics (NBS) report on bank credits shows that year-on-year (y/y) deposit money banks’ credit to the economy recorded an improvement in 2019, hitting N17.18 trillion compared to N15.1 trillion in 2018, N15.7 trillion in 2017 and N16.1 trillion in 2016.

The increase in lending has both positive and negative implications for the economy. While credit is a catalyst for growth, it also increases risk pressure on lenders. Hence, experts are also worried the increase in LDR could cause an increase in toxic loans, except the banks put adequate risk management frameworks in place.

Over the years, government depends heavily on the oil sector for both foreign exchange and revenue. Hence, the performance of the oil sector is a major determinant of the health of the economy. The 2016 recession was triggered by the crash in oil prices.

Efforts have been made to provide funds for the manufacturing and agricultural sub-sectors through various banking agents other than the deposit money banks, creating a missing link between the financial services and the real sector of the economy.

However, research has shown that a number of small and medium scale manufacturing firms and agriculturist in developing countries including Nigeria are faced with the challenge of accessibility to bank credits, which can be attributed to the underdeveloped structure of the financial system,

To grow the economy by making credit available to the real sector, the Loan-to-Deposit Ratio (LDR) of banks was raised to 65 per cent in October 2019. That was a month after a similar increase. This is because the survival or otherwise of the real sector is largely dependent on access to finance. The increase in LDR boosted credit access.