CBN increases LDR, sets new deadline for banks

The Central Bank of Nigeria (CBN) has issued a fresh circular mandating commercial banks operating in the country to lend out up to 65% of their customer deposits.

In a new circular addressed to all banks, the CBN disclosed that the minimum Loan to Deposit Ratio (LDR) target for all Deposit Money Banks (DMBs) has been reviewed upward from the initial 60% to 65%.

According to the information contained in the circular titled: ‘Regulatory measures to improve lending to the real sector of the Nigerian economy’, the major reason cited by the CBN for the newly revised LDR is the noticeable “growth in the level of the industry gross credit”.

For instance, the apex bank stated that the industry gross credit increased by N829.4 billion or 5.33% from 15.5 trillion at the end of May 2019 to N16.3 trillion as at September 26, 2019.

The CBN, therefore, disclosed that the LDR was reviewed upward in line with provisions of the earlier circular and in order to sustain the momentum.

Also, the CBN has set a new date as the ultimatum for banks to comply with the new 65% LDR.

Recall the initial target set by the apex bank was September 30th, however, it stated that all DMBs are to now attain a minimum LDR of 65% by December 31 2019.

According to the circular, to encourage SMEs, Retail, Mortgage and Consumer Lending, these sectors shall be assigned a weight of 150% in computing the LDR for this purpose.

It was further disclosed that failure to meet the new minimum LDR by December 31st shall result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall implied by the target LDR.

The CBN also stated it 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.

Meanwhile, experts have raised concerns that initial 60% LDR would expose banks and skyrocket the Non-Performing Loans. Despite this, the CBN has revised LDR to 65% and banks are expected to brace up.

Following the latest development, while companies and businesses with strong cash flows and collateral will have significantly higher chances of obtaining loans, banks will also have to invest heavily on strategies that can help mitigate against lending risk.