The Central Bank of Nigeria (CBN) has dropped the loan to deposit ratio to 60 percent in order to ramp up growth of the Nigerian economy through investment in the real sector.
A financial expert Ayo Akinwunmi told Daily Trust that if banks are to comply with the directive, over N1.5 trillion additional money will be available as credits to the real sector of the economy.
A circular by the apex bank stated that all Deposit Money Banks (DMBs) are now required to maintain a minimum Loan to Deposit Ratio (LDR) of 60% by September 30, 2019. This ratio shall be subject to quarterly review.
Hitherto, banks maintained a loan to deposit ratio of not more than 80 per cent. CBN said the directive is to encourage SMEs, retail, mortgage and consumer lending.
“These sectors shall be assigned a weight of 150% in computing the LDR for this purpose,” the Director of Banking Supervision, Mohammed Abdullahi, said in the circular.
The CBN shall provide a framework for classification of enterprises/businesses that fall under these categories.
The apex bank stated that failure to meet the 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 LDR.
The CBN said it shall continue to review developments in the market with a view to facilitating greater investment in the real sector of the Nigerian economy.
The Head of Research at FSDH, Ayo Akinwunmi said: “Given the positions of customer deposits and loans of commercial banks in Nigeria as at December 2018, if banks are to comply with the directive from the Central Bank of Nigeria, over N1.5 trillion additional money will be available as credits to the real sector of the economy.”
Akinwunmi said with the development, more money from banks’ customer deposits would be channelled as lending to the real sector of the economy.
He further argued that it is also possible that commercial banks may sell some of the holding of fixed income securities in their portfolio to enable them meet the regulatory requirement, adding that may lower price with a possibility of increasing yields on fixed income securities.
“However, it is also important to address those hindrances to lending in Nigeria, otherwise lending in the name of complying to meet regulatory requirement may lead to a rise in non-performing loans.”
