CBN to increase LDR to 70%

The Central Bank of Nigeria (CBN) is reportedly set to increase banks’ Loan to Deposit Ratio (LDR) to 70% by 2020.

Speaking at the 2019 workshop for Finance Correspondents and Business Editors, organized by the Nigeria Deposit Insurance Corporation (NDIC) in Yola, Adamawa State, CBN’s Director, Banking Supervision, Mr. Hassan said the introduction of the LDR has enhanced credit into the economy. Hence, the CBN will move the LDR to 70%.

Recall, in October, the CBN issued a fresh circular mandating commercial banks operating in the country to lend out up to 65% of their customer deposits from the initial 60%.

Three months later, the CBN issued another circular addressed to all banks, raising the LDR target for all Deposit Money Banks (DMBs) from the initial 60% to 65%.

According to the information contained in the circular, the major reason for the newly revised LDR is the noticeable “growth in the level of the industry gross credit”.

Following this, the CBN set December 31st as the ultimatum for banks to comply with the new 65% LDR.

Already, criticisms that have trailed the current 65%, as experts have argued that the 65% LDR for banks may worsen the non-performing loans in the economy.

Speaking recently, the Chief Executive Officer, Financial Derivatives Company Limited (FDC), Mr. Bismarck Rewane, stated that lenders will “struggle” in their bid to comply with the directive.

Rewane stated, “the banks have not opened the credit spigot and borrowers cannot wait to draw down the loans on the one hand.

“On the other hand, investors and savers are looking desperately for alternative asset classes. This is reducing the marginal propensity to save whilst increasing the marginal propensity to consume and import.

“The prognosis is that either we see a surge in credit and growth or we witness outflows from the system. In all cases, the financial sector is in for an effervescent year-end for 2019 and an interesting 2020.”

Similarly, the International Monetary Fund (IMF) has disclosed that the balance sheets of banks would be weak due to the directive from the Central Bank of Nigeria that deposit money banks should achieve a 65% LDR.

The global firm argued in its Regional Economic Outlook for sub-Saharan Africa report that the development would significantly weaken banks’ balance sheets and lower the cost of funds.

Despite the IMF’s warning, the Central Bank has indicated it has no plan to reduce the LDR, but may rather increase it. According to the CBN governor, Godwin Emefiele, while reading the communique of the last Monetary Policy Committee meeting, the 65% LDR policy action has yielded positive actions.

While the CBN is yet to release an official statement to this effect, this means the reported plan by the CBN to increase the LDR to 70% comes amidst the deadline for the recent increase.