The Central Bank of Nigeria (CBN) has issued a new directive to all Deposit Money Banks (DMBs) in the country on the reduction of their loan-to-deposit ratio (LDR) to 50% as part of its ongoing regulatory measures introduced in response to evolving economic conditions in the country.
The latest adjustment of the LDR by the apex bank, which immediately becomes effective, marks a 15%-point decrease from the previous rate.
The change aligns with the CBN’s recent shift towards a more contractive monetary policy measure and aligns with its recent Cash Reserve Ratio (CRR) requirements, which have been raised to 45% for DMBs and 14% for merchant banks.
The new directive titled ‘RE: Regulatory Measures to Improve Lending to the Real Sector of the Nigerian Economy’ and signed by the Acting Director, Banking Supervision Department, Dr. Adetona Adedeji, is a follow-up to a circular released on January 20, 2020.
The circular reads: “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”, it added.
Based on the latest directive, banks are now required to modify their lending strategies to align with revised LDR of 50%.
Analysts believe that the regulatory measure will impact on banks’ credit to businesses, particularly on large and medium-scale enterprises that depend on the lenders for their operations.
