Nigeria’s banking regulator has increased the Loan-to-Deposit Ratio (LDR) for commercial banks to 65 percent with a compliance deadline of December 31, 2019. This follows an initial directive in July that mandated banks to lend up to 60 percent of their customer deposits with a September 30 ultimatum.
The Central Bank of Nigeria (CBN), in a circular, addressed to all deposit money banks (DMBs) in the country, explained that its decision to review the LDR was based on the “appreciable growth in the level of the industry gross credit” after the initial policy was introduced.
The circular, titled Regulatory measures to improve lending to the real sector of the Nigerian economy, is signed by the Director of Banking and Supervision, Bello Hassan.
For instance, industry gross credit increased by N829.4 billion or 5.33 percent from 15.5 trillion at the end of May 2019 to N16.3 trillion as of September 26, 2019, the bank revealed. The LDR was then reviewed upward in line with provisions of the earlier circular and in order to sustain the momentum.
“In order to sustain the momentum and in line with the provisions of our earlier letters, the minimum Loan to Deposit Ratio target for all Deposit Money Banks is hereby reviewed upwards,” the apex bank said.
Similar to the previous policy, the Small and Medium Enterprises (SMEs), retail mortgage and consumer lending sectors shall be assigned a weight of 150 percent in computing the LDR to encourage lending, the bank added.
The CBN’s decision to increase the rate of lending by banks has raised concerns, particularly on the basis of the high rate of bad loans in the country – Non-Performing Loans (NPLs) stood at N1.69 trillion as of March this year.
Considering the situation, banks are expected to brace up, Nairametrics says. While businesses with strong cash flows and collateral will have significantly higher chances of obtaining loans, banks have to invest heavily in strategies that can help mitigate lending risk.
All DMBs now have until December 31, 2019, to attain a minimum LDR of 65 percent, which is subject to quarterly review. Failure to comply with the new directive by the specified date would attract a levy of additional Cash Reserve Requirement (CRR) equivalent to 50 percent of the lending shortfall implied by the target LDR.
Up to 12 banks that failed to meet the September deadline under the first directive forfeited almost N500 billion. The affected banks include industry behemoths First Bank of Nigeria, United Bank for Africa, Guaranty Trust Bank and Zenith Bank.
Others include Citibank, FBN Quest Merchant, First City Monument Bank, Standard Chartered Bank, Jaiz Bank, Keystone Bank, Rand Merchant Bank, and Suntrust. Reports say that the respective accounts of the affected banks at the central bank have already been debited.
Meanwhile, the regulator added that it would continue to review developments in the market with a view to facilitating greater investment in the real sector of the economy while providing a safe, sound and resilient financial system.