In a bid to fortify lending to the real sector and align with its current monetary tightening policies, the Central Bank of Nigeria (CBN) has introduced new regulatory directives effective April 17, 2024.
The directive, articulated in circular BSD/DIR/PUB/LAB/017/005 and endorsed by the Acting Director of Banking Supervision, Adetona Adedeji, heralds a significant shift towards a more contractionary approach. Notably, the CBN has slashed the loan-to-deposit ratio (LDR) by 15 percentage points, lowering it to 50 per cent.
This adjustment mirrors the recent increase in the Cash Reserve Ratio (CRR) rate for banks and underscores the CBN’s commitment to fostering liquidity while maintaining prudent risk management practices. The LDR, a vital metric for evaluating banks’ liquidity, compares total loans to total deposits and is now a mandated benchmark for all Deposit Money Banks (DMBs).
Emphasizing the importance of robust risk management, Adedeji underscored the CBN’s intent to vigilantly monitor compliance and adjust the LDR as needed based on market dynamics. Adedeji urged banks to swiftly adapt their operations to adhere to the revised LDR, acknowledging the substantial impact this regulatory modification is expected to have on the banking sector and the broader Nigerian economy.
The circular highlighted, “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.”