CBN directs banks to maintain 60 per cent loan-to-deposit ratio
The CBN said the move will boost growth of the Nigerian economy through investment in the real sector.
The Central Bank of Nigeria (CBN) has instructed deposit money banks (DMBs) to maintain a minimum of 60 per cent loan-to-deposit ratio (LDR) with effect from 30th September, 2019. The CBN, in a circular sent to all banks on Thursday, said the move will ramp up growth of the Nigerian economy through investment in the real sector, adding that the LDR will be reviewed quarterly.
The LDR, usually expressed in percentage, is used to measure the liquidity of a bank by comparing its total loans and total deposits for a specified period. It shows a bank’s ability to cover loan losses and withdrawals by its customers. When the percentage is high, it means the bank may not be liquid enough to cover unforeseen fund requirements. And when it is too low, the bank may not be earning as much as it could be earning.
The apex bank also said the weight of 150 per cent should be assigned to the small and medium enterprises, retail, mortgage and consumer lending sectors when computing the LDR. The CBN will provide the framework for the classification of enterprises or businesses that fall under these categories.
“Failure to meet the above minimum LDR by the specified date shall result in a levy of additional cash reserve requirement equal to 50 per cent of the lending shortfall of the target LDR,” the apex bank said.
The cash reserve ratio (CRR) is the minimum percentage of a bank’s total deposit that must be held onto, rather than invested or borrowed. The CRR is currently set at 22.50 per cent.
Last month, the CBN governor, Godwin Emefiele, unveiled the priorities of the bank for the next five year of his second term. One of the priorities is to continue to work with deposit money banks to improve access to credit for not only smallholder farmers, as the Agricultural Credit Guarantee Scheme Fund does, but also consumer credit and mortgage facilities for banks’ customers.
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