The Central Bank of Nigeria (CBN) has issued a new directive to all Deposit Money Banks (DMBs) introducing a reduction in the loan-to-deposit ratio (LDR) to 50%.
This significant policy adjustment, effective immediately, marks a 15%-point decrease from the previous rate.
The change is a strategic move aligning with the CBN’s recent shift towards a more contractionary monetary approach, in sync with heightened Cash Reserve Ratio (CRR) requirements, which have been raised to 45% for DMBs and 14% for merchant banks.
The new directive signed by Dr Adetona S. Adedeji, Acting Director of the Banking Supervision Department of the CBN, and titled ‘RE: Regulatory Measures to Improve Lending to the Real Sector of the Nigerian Economy’ is a follow-up to a circular released on January 20, 2020.
It underlines the CBN’s ongoing commitment to refining its regulatory framework in response to evolving economic conditions.
The circular read:
- “The Central Bank of Nigeria’s (CBN) regulatory directive on the above subject dated January 20, 2020, referenced BSD/DIR/GEN/LAB/12/070 refers.
- “Following a shift in the Bank’s policy stance towards a more contractionary approach, it is imperative to review the loan-to-deposit ratio (LDR) policy to align with the current monetary tightening by the CBN.
- “Accordingly, the CBN has decided to reduce the LDR by 15 percentage points to 50%, in a similar proportion to the increase in the CRR rate for banks. All DMBs are required to maintain this level and are further advised that average daily figures shall continue to be applied to assess compliance.
- “While DMBS are encouraged to maintain strong risk management practices regarding their lending operations, the CBN shall continue to monitor compliance, review market developments, and make alterations in the LDR as it deems appropriate.”
Impact on Banks and Borrowers
Banks are now required to recalibrate their lending strategies, adhering to the revised LDR of 50%. This measure is anticipated to influence the banks’ ability to offer credit, particularly impacting large and medium-scale enterprises that are dependent on bank financing for their operations.
This reduction might tighten the credit available to businesses, potentially escalating interest rates. However, it also positions the banks to be more circumspect in their lending operations, potentially safeguarding the financial system against undue risk exposure.
Implications for the Nigerian Economy
This policy revision is part of a broader strategy by the CBN to bolster the economy by directing bank resources more efficiently. By adjusting the LDR, the CBN aims to mitigate excessive lending risks and ensure that depositors’ funds are judiciously utilized, fostering a healthier banking sector and, by extension, a more robust economy.
Ongoing Monitoring and Compliance
The CBN has emphasized that it will continue to monitor compliance rigorously and review market developments to make necessary adjustments to the LDR. This ensures that the policy remains effective and responsive to the dynamics of the economic landscape.
Banks have also been urged to sustain robust risk management practices. The CBN’s directive highlights the importance of maintaining a balance between stimulating economic growth through lending and preserving the stability of the financial system.