The Central Bank of Nigeria (CBN) has announced a revision of the loan-to-deposit ratio (LDR) for banks, reducing it from 65 percent to 50 percent to align with the current monetary tightening measures.
This move aims to regulate the circulation of money in the
economy, especially during periods of liquidity strain. During its last
monetary policy committee (MPC) meeting on March 26, the CBN maintained the CRR
at 45 percent and liquidity ratio at 30 percent.
LDR serves as a gauge of a bank’s liquidity, comparing its
total loans to total deposits. An uptick in the LDR enables banks to extend
more credit to both businesses and individuals, while a downturn restricts
their ability to lend from depositors’ funds.
In a circular titled ‘Re: Regulatory Measures to Improve
Lending to the Sector of the Nigerian Economy,’ signed by the acting director
of banking supervision department, Adetona Adedeji, the CBN disclosed the
reduction, attributing it to a shift in the bank’s policy stance towards a more
contractionary approach.
The CBN emphasized the need for all Deposit Money Banks
(DMBs) to adhere to the revised LDR of 50 percent, with average daily figures
applied for compliance assessment.
“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%, 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,” the central bank said in a circular that was cited by
Business day.
While urging DMBs to maintain robust risk management
practices, the CBN assured of continued monitoring of compliance, market
dynamics, and adjustments to the LDR as necessary.
Additionally, the CBN recently announced the cessation of
daily cash reserve ratio (CRR) debits on commercial bank deposits as part of
its monetary policy measures.
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