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.
