Home Economy CBN raises minimum loan to deposit ratio for banks

CBN raises minimum loan to deposit ratio for banks

by Business News Report

Central Bank of Nigeria has increased its target for lending by commercial banks for the second time in three months, to help boost growth. Banks that miss the target will face higher cash-reserve requirements. CBN, in a circular dated September. 30th signed by Bello Hassan For: Director Banking Supervision directed banks to increase their minimum loan-to-deposit ratio to 65 per cent from the previous target of 60per cent which it set in July 2019. The circular said “The Central Bank of Nigeria (CBN) has noted the appreciable growth in the level of the industry gross credit, which increased by N829.40 billion or 5.33 per cent from N15,567.66 billion at end-May 2019, to N16,397.06 billion as at September 26, 2019 following its pronouncements on the above initiative. 

“In order to sustain the momentum and in line with the provisions of our earlier letter, the minimum Loan to Deposit Ratio (LDR) target for all Deposit Money Banks (DMBs) is hereby reviewed upwards from 60 per cent to 65 per cent. Consequently, all DMBs are required to attain a minimum LDR of 65% by December 31, 2019 and this ratio shall be subject to quarterly review. To encourage SMEs, Retail, Mortgage and Consumer Lending, these sectors shall be assigned a weight of 150 per cent in computing the LDR for this purpose. Failure to meet the above minimum LDR by the specified date shall result in a levy of additional Cash Reserve Requirement equal to 50% of the lending shortfall implied by the target LDR.

“DMBs are required to continue to strengthen their risk management practices particularly with regards to their lending operations. The CBN shall continue to review developments in the market with a view to facilitating greater investment in the real sector of the Nigerian economy whilst promoting a safe, sound and resilient financial system. This letter is with immediate effect. Economic growth in Nigeria slowed to an annual rate of 1.94 per cent in the three months to the end of June, the second quarter in a row of declines, as the country struggles to shake off the effects of a recession it escaped two years ago. The Central Bank has been trying to boost credit to businesses and consumers after that recession, but lending has yet to pick up. With growth slow, banks prefer to park cash in risk-free government securities rather than lend to companies and consumers.

The central bank said loans grew by 5.3 per cent to N16.40 trillion as at the end of September, the deadline it earlier set for lenders to boost their minimum loan-to-deposit ratios to 60 per cent. The latest measure is designed to sustain the momentum, the central bank said, as it steps up efforts aimed at getting banks to play a bigger role in helping revive the economy. However, analysts worry that growing credit quickly in a weak economy could impact asset quality and weaken banks capital positions as the impact of the new policy would be closely watch as third quarter earnings begin to trickle in this month.

On Wednesday, banking stocks fell 4.44 per cent, to its lowest level in three weeks, led by pan-African lender Ecobank while overnight lending rates shot up to 20 per cent from between 7 per cent and 12 per cent its previous close on Monday. Traders expected short-dated treasury yield to rise as central bank’s action against banks that fail to meet the loan requirement could drain liquidity. The central bank in July shifted policy from tight liquidity to prop up the Naira to trying to get banks support the economy by growing loans. The bank wants to channel loans to small firms, mortgage and consumer lending. Rencap analysts said banks are expecting a debit of around 420 billion naira from the central bank as sanction to lenders that failed to meet the regulator’s loan target last month. “The (cash reserve) debits are … even more negative than we previously thought,” Rencap said in a note. “On the flip side, banks that choose prudence suffer margin and earnings pressure from higher CRR as all that cash will now earn 0 per cent vs 13-15 per cent yield on risk-free assets.”

Related Posts