CBN reduces banks’ LDR to 50%

The Central Bank of Nigeria (CBN) has announced a downward review of the loan-to-deposit ratio (LDR).

CBN reduced the LDR from 65 to 50 percent to align with the ongoing monetary tightening

LDR is used to assess a bank’s liquidity by comparing its total loans to its total deposits.

An increase in the loan-to-deposit ratio allows banks to expand their credits to businesses and individuals, however, a decline in LDR reduces their ability to loan customers from depositors’ funds.

CBN disclosed the increase in a circular on Wednesday titled ‘Re: Regulatory Measures to Improve Lending to the Sector of the Nigerian Economy’, signed by Adetona Adedeji, its acting director of the banking supervision department.

“Following a shift in the Bank’s policy stance towards a more contractionary approach, it is imperative to review the loan-to-deposit ratio (LDR) policy to align with the current monetary tightening by the CBN,” the apex bank said.

“Accordingly, the CBN has decided to reduce the LDR by 15 percentage points to 50%, in a similar proportion to the increase in the CRR rate for banks.

“All DMBs are required to maintain this level and are further advised that average daily figures shall continue to be applied to assess compliance.

“While DMBs are encouraged to maintain strong risk management practices regarding their lending operations, the CBN shall continue to monitor compliance, review market developments, and make alterations in the LDR as it deems appropriate.”

On February 2, the CBN said it would stop daily cash reserve ratio (CRR) debits of deposits in commercial banks.

CRR is one of the monetary policy tools the CBN uses to limit the circulation of money or supply in the economy as the bank’s liquidity drops.

At the last monetary policy committee (MPC) meeting on March 26, the CBN retained the CRR at 45 percent and the liquidity rate at 30 percent.

The monetary policy rate (MPR) was raised by 200 basis points to 24.75 percent.