Four years after, CBN to sanction banks flouting loan-to-deposit ratio policy

THE Central Bank of Nigeria (CBN) says it will start to enforce sanctions on banks flouting its rules on the loan-to-deposit ratio (LDR), which it instituted over four years ago.

In the circular dated September 30, 2019, to all banks, the CBN vowed to enforce a 50 per cent levy on banks not meeting its requirement on LDR policy.

The policy came after the apex bank raised the LDR of banks from 60 per cent to 65 per cent, a target meant to encourage small and medium-sized enterprises (SMEs), retail, mortgage and consumer lending.

It was also intended to improve lending to customers to stimulate the real sector of the economy, LDR policy implies that for every N100 received as a deposit, the banks are to lend N65 to customers.

“Failure to meet the above minimum LDR by the specified date shall result in a levy of additional cash reserve requirement equal to 50 per cent of the lending shortfall implied by the target LDR,” CBN stated in the September 2019 circular.

But findings by the The ICIR in a report on July 30, 2023, showed that in the last four years, most banks had yet to meet the CBN 65 per cent minimum LDR requirement for customers.

The report came after the apex bank reiterated its determination to enforce the 65 per cent LDR policy effective July 31, 2023, on banks flouting the directive but failed to execute its threat.

The CBN warned that banks with LDR below the minimum requirement as of the date and month after that would be liable to a CRR surcharge of up to 50 per cent of the lending shortfall.

Banks were before now maintaining a 32.5 per cent CRR with CBN, which represents a specified minimum fraction of the total deposits of customers.

The LDR is used to assess a bank’s liquidity by comparing total loans to deposits for the same period, which impacts both liquidity and solvency in the short, medium and long term.

In a recent circular to banks dated February 2, the CBN not only said it would discontinue the daily withdrawal of CRR from banks but also that it was determined to enforce the 50 per cent levy on the lending shortfall on LDR.

    “CRR levy of 50 per cent of the lending shortfall will be enforced for banks that do not meet the minimum loan-to-deposit ratio (LDR).

    “The CBN will provide your bank with details of the applied charges and their underlying computation rationale,” the apex bank stated.

    Stressing stopping the daily CRR debits, CBN stated that it would adopt an updated CRR mechanism to facilitate banks’ capacity for planning, monitoring, and aligning their record with the apex bank.

    The determination of the segment of deposits subject to sterilisation with the CBN as CRR will follow the processes outlined, it said, adding that “the extant ratios (commercial banks 32.5 per cent and merchant banks 10 per cent) will be applied to increases in the banks’ weekly average adjusted deposits.”

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