CBN New Directive On Lending, How Realistic?

The Central Bank of Nigeria (CBN) released a circular last week which directed banks to lend 60 percent of their Liquidity-Deposit-Ratio (LDR) to certain sector of the economy. The directive came with a proviso that banks that failed to obey the directive could have their cash Reserves Requirement (CRR) jerk up.

What this simply means is that banks that are reluctant to extend loans to the specific sectors of the economy should be prepared to have the portion of their liquidity taken away from them and kept in the regulatory bank’s vault without earning any interest on such.
The motive behind this directive is sure noble and should be applauded by many Nigerians who are seriously concerned about the fragile nature of the country’s economy and want something done about it..
From one Monetary Policy Committee (MPC) meeting to the other, members of the rate-setting committee have expressed concerns over the failure of many banks to extend loans to the productive sectors of the economy. The shrinking intermediation role by banks is already having serious negative impact on the economy.
According to CBN financial sector stability report, banks are investing about 70 percent of their liquid assets in government treasuries and other debt instrument, which are considered safe and attract high returns.
The regulatory bank has also pointed out that loans to private sector have continued to decline since 2017 and something should be done to curb the trend.
In fact, some people are accusing many banks of fleecing their customers through various means so as to stay afloat, since earning from their traditional role has continued to shrink.
However, the truth could be located somewhere in the centre of the weak economic environment they are operating in.
Banks aversion to granting credit was a fall out of cumulative experiences of the past when many people deliberately borrowed from the industry and failed to pay back. Latest data on Non-Performing Loans (NPLs) in the banking industry shows that it declines to 10.95 percent in April, nevertheless, this remain higher than the 5 percent prudential limit.
As much as the CBN latest directive was desirable, the truth remains that under the present conditions, banks will continue to find it difficult to lend to the private sector unless both the fiscal and monetary authorities take decisive steps to correct the imbalance in the system.
The government should reform the judicial system and ensure that those who resort to the court to prevent banks from recovery their outstanding loans are not granted undue advantage through legal technicalities.
The regulatory bank should strengthen the credit bureau to ensure that people who are recalcitrant debtors are screened out, blacklisted and deny access to bank facility as deterrent to other would-be-debtors.
Banks should also be helped to strengthen their risk management department to ensure that frivolous credits are not extended to those who do not deserve it.
Without adequate measures to discourage recalcitrant debtors from walking away freely despite failure to fulfill their obligations; the CBN attempts to boost the economy through increased credit to private sector will ended up a pipe dream.