CBN pushes commercial banks into a tight corner with new lending policy

CBN sets 60% minimum loan-to-deposit ratio (LDR) for banks in order to ramp up the Nigerian economy.
The apex bank says failure to meet the above minimum LDR will face a cash reserve penalty.
Analyst tells Business Insider SSA that CBN is correcting market anomalies to ensure economic growth.

The Central Bank of Nigeria (CBN) has set at least 60% minimum loan-to-deposit ratio (LDR) for banks in order to ramp up the Nigerian economy.

Nigerian banks find it hard to lend customers despite the initial 80% benchmark on loan to deposit ratio as a result of bad debts and high NPL. With this new policy, the CBN has mandated commercial banks to lend to the real sector or face stiff sanction.

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The new measure, CBN said it will help to grow the Nigerian economy through investment in the real sector.

Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall of the target loan to deposit ratio, the letter reads.

Godwin Emefiele- CBN Governor ece-auto-gen

The cash reserve is certain of amount that commercial banks deposited with the apex bank.

Ahmad Abdullahi, Director of Banking Supervision at CBN, in a letter dated July 3, seen by Business Insider SSA, that “to encourage lending to small businesses and consumers and more mortgages, these sectors shall be assigned a weight of 150% in computing the LDR.

“All deposit money banks are hereby required to maintain a minimum Loan to Deposit Ratio (LDR) of 60% by September 30, 2019.

“This ratio shall be subject to quarterly review.”

What does this mean for banks?

Marina, Lagos island where some banks are headquartered ece-auto-gen

LDR shows a bank's ability to cover loan losses and withdrawal by customers. It is used to ensure that there is adequate liquidity to cover loans in case of an unforeseen downturn in loan defaults.

“The policy has been implemented as banks liquidity ratio increase primarily because CBN noticed banks have been accumulating government securities(a lot of OMO bills) while lending to the private sector decreased.

“Credit has not been flowing very well in the real sector in the last five years and this is just a policy to correct the anomalies,” Abimbola Omotola, Fixed Income and Currency specialist at Ecobank Research tells Business Insider SSA.

Omotola said most large banks actually have more loan to deposit ratio higher than this particular requirement and only a few tier ones banks will be affected.