The Central Bank of Nigeria (CBN), in its bid to improve lending to the real sector of the Nigerian economy, has upwardly reviewed, for the second time this year, deposit money banks’ portion of minimum loanable deposits to 65 percent with immediate effect.
The decision, which is subject to quarterly review, was informed by appreciable growth in the level of the banking sector’s gross credit following the pronouncement of a 60 percent minimum Loan-to-Deposit ratio (LDR) in July 2019 and the need to sustain the momentum, the apex bank said in a recent circular seen by BusinessDay.
“All Deposit Money Banks are required to attain a minimum of LDR of 65 percent by December 31, 2019,” the CBN said. “To encourage the SMEs, Retail, Mortgage and Consumer Lending, these sectors shall be assigned a weight of 150% in computing the LDR for this purpose.”
Loan-to-Deposit ratio (LDR) compares a bank’s total loans to its total deposits for the same period. A higher LDR means the bank is issuing out more of its deposits in loans and vice versa.
The CBN noted that gross credit of banking sector rose from N15.56 trillion as at end-May 2019 to N16.39 trillion as at September 26, 2019, translating to N829.40 billion or 5.33 percent increase within the period.
The financial regulator is determined to ramp up growth in Africa’s largest economy on the back of continued sluggish expansion in Nigeria’s aggregate economic activities since its emergence from a recession in the second quarter of 2017. The economy grew 1.94 percent in the second quarter of this year from a revised 2.10 percent in the previous quarter, casting a shadow on the International Monetary Fund’s annual growth forecast of 2.3 percent for the country.
According to the circular, failure to meet the minimum LDR before the end of 2019 would result in a levy of additional Cash Reserve Requirement equal to 50 percent of the lending shortfall implied by the target LDR.
This implies any bank that fails to maintain the specified LDR would risk being required t pack more of the excess funds with the CBN where it would not earn much in interest and could not be used to purchase Federal Government securities such as bonds and treasury bills.
Although banks’ non-performing loan ratio declined by 25.62 percent in the second quarter of this year from the same period last year, according to data from the National Bureau of Statistics, the CBN directed the lenders to continue to strengthen their risk management practices particularly with regards to their lending operations.
The apex bank further noted it that shall continue to review developments in the market with a view to facilitating greater investment in the real sector of the Nigerian economy whilst promoting a safe sound and resilient financial system.
