CBN Reduces Banks’ Loan-to-Deposit Ratio to 50%

Confidence UbaniApril 18, 20241 Mins read154

CBN

The Central Bank of Nigeria (CBN) has slashed banks’ Loan-to-Deposit Ratio (LDR) from 65% to 50% to enhance lending to the real sector of the Nigerian economy. This move follows previous increases in the LDR, with the latest adjustment effective April 17, 2024.

The decision was announced in a circular signed by the Acting Director of Banking Supervision, Adetona Adedeji, who emphasised the need to align with the CBN’s monetary tightening measures and the Cash Reserve Ratio (CRR) requirement.

The circular read in part,

Following a shift in the Bank’s policy stance towards a more contractionary approach, it is crucial to revise the loan-to-deposit ratio policy to conform with the CBN’s ongoing monetary tightening.

Consequently, the CBN has decided to decrease the LDR by 15 percentage points to 50 per cent, proportionate to the rise in the CRR rate for banks. All DMBs must maintain this level, and it is advised that average daily figures will still be applied for compliance assessment.

While DMBs are urged to sustain strong risk management practices concerning their lending operations, the CBN will persist in monitoring compliance, reviewing market developments, and making necessary adjustments to the LDR. Please be guided accordingly.

Loan-to-Deposit Ratio

Loan-to-Deposit Ratio (LDR) is a metric used to assess a bank’s liquidity by comparing its total loans to total deposits. Simply, it looks at how much money a bank receives from customers is used to give out loans.

For example, if a bank has ₦10 billion in deposits and lends out $7 billion in loans, its LDR would be 70%. Banks use the LDR to manage their liquidity and ensure they have enough funds available to meet customer withdrawal requests while also fulfilling their lending activities. A very low LDR might indicate that the bank is too conservative with its lending practices, whereas a very high one implies liquidity risks.

Some business analysts at Afrinvest Securities noted that CBN’s reduction aims to ease pressure on lenders while ensuring compliance with CRR directives of 45 per cent. Adedeji stressed the importance of robust risk management practices in lending operations. The move will significantly impact the banking sector and the broader economy.

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