As part of the ongoing monetary tightening measures, the Central Bank of Nigeria (CBN) has stated that the loan-to-deposit ratio (LDR) for banks will be revised, going from 65 percent to 50 percent.
Specifically during times of liquidity strain, this action seeks to control the flow of money across the economy. The CBN held the cash ratio at 30% and the CRR at 45% during the most recent meeting of the monetary policy committee (MPC), which took place on March 26.
LDR compares a bank’s total loans to its total deposits to determine how liquid the bank is. While a downturn limits banks’ ability to lend from depositor funds, an increase in the LDR allows them to give credit to more individuals and enterprises.
The reduction was announced by the CBN in a circular titled “Re: Regulatory Measures to Improve Lending to the Sector of the Nigerian Economy,” which was signed by Adetona Adedeji, acting director of the banking supervision department. The bank attributed the decrease to a change in the bank’s policy stance toward a more contractionary approach.
The amended LDR of 50% must be followed by all Deposit Money Banks (DMBs), according to the CBN, which stressed the application of average daily data for compliance evaluation.
Reviewing the loan-to-deposit ratio (LDR) policy is essential in order to bring it into compliance with the CBN’s current monetary tightening.
In light of this, the CBN has decided to lower the LDR by 15 percentage points to 50%, in line with the rise in the bank CRR rate.
The central bank stated in a circular that Business Day noted, “All DMBs are required to maintain this level and are further advised that average daily figures shall continue to be applied to assess compliance.”
The CBN promised to continue monitoring compliance and market conditions and to make any required adjustments to the LDR, all the while encouraging DMBs to continue their strong risk management measures.
As part of its monetary policy actions, the CBN has recently declared that it will no longer be debiting daily cash reserve ratios (CRRs) on deposits made by commercial banks.