THE Central Bank of Nigeria (CBN) has reviewed its loan-to-deposit ratio (LDR) policy to align with its current monetary tightening, reducing the LDR by 15 percentage points to 50 per cent.
The apex bank disclosed this in a circular issued on Wednesday, April 17, titled ‘Re: Regulatory Measures to Improve Lending to the Sector of the Nigerian Economy’, and signed by the acting director of the Banking Supervision Department, Adetona Adedeji,.
According to the bank, the decision followed a shift in its policy stance towards a more contractionary approach.
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With this reduction, all deposit money banks are restricted in their ability to offer credits/ loans to businesses and individuals.
The circular read, “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 per cent, 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.”
Analysts say the policy will further squeeze lending to businesses and the manufacturing sector, many of whom are not getting funds from commercial banks to drive their businesses, with CBN’s lending rate at 24.75 per cent.
“We cannot keep out the commercial and merchant banks from funding businesses. It will spell doom for the economy. The apex bank as it plans to recapitalise should ensure that banks have the financial strength to fund the manufacturing sector for the growth of the economy,” former Director-General of the Lagos Chamber of Commerce (LCCI) Muda Yusuf told The ICIR.
With the new policy, banks must now recalibrate their lending strategies, adhering to the revised LDR of 50 per cent. 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
Recall that the apex bank’s Monetary Policy Committee (MPC) hiked the benchmark interest rate by 200 basis points to 24.75 per cent in March.
The governor of the apex bank, Olayemi Cardoso, also announced that the Cash Reserve Ratio (CRR) of deposit money banks would remain at 45 per cent. However, the MPC adjusted the CRR of merchant banks from 10 per cent to 14 per cent.
The committee also retained the liquidity ratio at 30 per cent.
Analysts say further monetary tightening without incentives to manufacturers and the real sector is not good for the economy, with inflation at 33 per cent.
“The fiscal side must support efforts of the monetary policy. Further tightening is crowding out the private sector from bank lending,” an economist, Dumebi Oluwole, said.
Harrison Edeh is a journalist with the International Centre for Investigative Reporting, always determined to drive advocacy for good governance through holding public officials and businesses accountable.