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 per cent.
So called LDR refers to the interaction between total loans and total deposits, expressed as a percentage.
The LDR gives an insight into the proportion of assets a bank can create from its liabilities.
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, 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.
With this 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.
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.”