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%.
The new directive, which was disclosed by the apex bank in a circular yesterday, titled: ‘Re: Regulatory Measures to Improve Lending to the Sector of the Nigerian Economy’, signed by its Acting Director of the Banking Supervision Department, Adetona Adedeji, is a follow-up to a circular released on January 20, 2020.
This significant policy adjustment, effective immediately, marks a 15%-point decrease from the previous rate and underlines the CBN’s ongoing commitment to refining its regulatory framework in response to evolving economic conditions.
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.
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.
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 utilised, fostering a healthier banking sector and, by extension, a more robust economy.
