The Central Bank of Nigeria (CBN) is reportedly set to increase banks’ Loan to Deposit Ratio (LDR) to 70% by 2020.
According to a report published on Vanguard, the disclosure was made by CBN Director, Banking Supervision, Mr Hassan Belllo while speaking at the 2019 workshop for Finance Correspondents and Business Editors, organised by the Nigeria Deposit Insurance Corporation (NDIC) in Yola, Adamawa State.
According to Bello, the introduction of the LDR has enhanced credit into the economy. Hence, the CBN would move the LDR to 70%.
Recall that in October, the CBN issued a fresh circular mandating commercial banks operating in the country to lend out up to 65% of their customer deposits from the initial 60%.
The CBN forcing banks to lend: In an earlier article published on Nairametrics in July, the CBN, through a circular, mandated commercial banks operating in the country to lend out up to 60% of their customer deposits.
News continues after this ad
Three months later, the CBN issued another circular addressed to all banks, raising the LDR target for all Deposit Money Banks (DMBs) from the initial 60% to 65%.
According to the information contained in the circular, the major reason for the newly revised LDR was the noticeable “growth in the level of the industry gross credit”.
Following this, the CBN set December 31st as the ultimatum for banks to comply with the new 65% LDR.
Already, criticisms have trailed the current 65% LDR ratio, as experts have argued that it might increase the level of non-performing loans in the economy.
Speaking recently, the Chief Executive Officer, Financial Derivatives Company Limited (FDC), Mr Bismarck Rewane, stated that lenders would “struggle” in their bid to comply with the directive.
Rewane stated, “The banks have not opened the credit spigot and borrowers cannot wait to draw down the loans on the one hand.
News continues after this ad
“On the other hand, investors and savers are looking desperately for alternative asset classes. This is reducing the marginal propensity to save whilst increasing the marginal propensity to consume and import.
“The prognosis is that either we see a surge in credit and growth or we witness outflows from the system. In all cases, the financial sector is in for an effervescent year-end for 2019 and an interesting 2020.”
Speaking to Nairametrics, Financial expert and CEO, AfriSwiss Capital Assets Management Limited, Kalu Aja, stated, “The real headwind in the economy for banks is the CBN’s push to get banks to lend to the real sector, this may push the banking sectors to create risk assets but expose loan portfolio to more provisioning.”
IMF cautions CBN: Similarly, the International Monetary Fund (IMF) has disclosed that the balance sheets of banks would be weak due to the directive from the Central Bank of Nigeria that deposit money banks should achieve a 65% LDR.
The global firm argued in its Regional Economic Outlook for sub-Saharan Africa report that the development would significantly weaken banks’ balance sheets and lower the cost of funds.
Despite the IMF’s warning, the Central Bank has indicated it has no plan to reduce the LDR, but may rather increase it. According to the CBN governor, Godwin Emefiele, while reading the communique of the last Monetary Policy Committee meeting, the 65% LDR policy action has yielded positive actions.
“The MPC noted with pleasure, the positive outcome of actions already taken by the Bank. These actions include the current policy on loan-to-deposit ratio, which has resulted in loans and advances rising by over N1.1trillion between June to October 2019.
“It further noted that these actions have assisted in boosting credit to the agricultural and manufacturing sectors, hence, the positive outcome on the GDP. The MPC is hopeful that the LDR initiative must be sustained as interest rates being paid by borrowers have so far dropped by up to 400 basis points between June and October 2019. These have happened with the corresponding decline in NPLs to 6.5% at the end of October 2019.”
While the CBN is yet to release an official statement to this effect, this means the reported plan by the apex bank to increase the LDR to 70% is coming as the deadline for the recent increase approaches.