The Central Bank of Nigeria (CBN) has rolled out a new directive impacting all Deposit Money Banks (DMBs), slashing the loan-to-deposit ratio (LDR) to 50%. This notable policy shift, effective immediately, reflects a 15%-point reduction from the previous rate.
Aligned with the CBN’s recent move towards a more contractionary monetary stance, this adjustment complements heightened Cash Reserve Ratio (CRR) requirements, now set at 45% for DMBs and 14% for merchant banks.
The directive, signed by Dr. Adetona S. Adedeji, Acting Director of the Banking Supervision Department of the CBN, is titled ‘RE: Regulatory Measures to Improve Lending to the Real Sector of the Nigerian Economy.’ It builds upon a circular issued on January 20, 2020, affirming the CBN’s commitment to refining its regulatory framework in response to evolving economic dynamics.
According to the circular:
“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 CBN’s current monetary tightening.
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 monitoring compliance, reviewing market developments, and making alterations in the LDR as deemed appropriate.”
Impact on Banks and Borrowers
This adjustment necessitates banks recalibrating their lending strategies, adhering to the revised LDR of 50%. It is anticipated to affect credit availability, particularly for large and medium-scale enterprises reliant on bank financing.
While the reduction may tighten credit availability, potentially leading to increased interest rates, it also encourages banks to exercise caution in their lending operations, mitigating undue risk exposure.
Implications for the Nigerian Economy
Part of a broader strategy to bolster the economy, the CBN aims to direct bank resources more efficiently through this policy revision. By adjusting the LDR, the CBN seeks to mitigate lending risks and ensure prudent utilization of depositors’ funds, fostering a healthier banking sector and a more robust economy.
Ongoing Monitoring and Compliance
The CBN reiterates its commitment to stringent compliance monitoring and adjusting the LDR as necessary to align with market dynamics. Banks are urged to uphold robust risk management practices to balance fostering economic growth through lending and preserving financial system stability.
