CBN Retains 65% LDR, Sustains Penalty for Defaulting Banks

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•Reports increase in DMBs’ gross credit

Obinna Chima

The Central Bank of Nigeria (CBN) has decided, in the interim, to retain the minimum loan-to-deposit (LDR) ratio for commercial and merchant banks at 65 per cent.

It based its decision on what it described as remarkable increase in credit to the private sector.

The central bank stated this in a letter to all banks, dated January 7, 2020, which was signed by its Director of Banking Supervision, Mr. Ahmad Abdullahi, a copy of which THISDAY obtained yesterday.

The deadline for banks to achieve a 65 per cent LDR elapsed on December 31, 2019, with sanctions applied on those that defaulted.

However, the central bank pointed out that failure to achieve the target would continue to attract levies of additional cash reserve requirement of 50 per cent of the lending shortfall of the target LDR on or before March 31, 2020.

“The CBN has noticed remarkable increase in the size of gross credit by deposit money banks (DMBs) to customers. “Accordingly, the CBN has decided to retain the minimum 65 per cent LDR in the interim. All DMBs are required to maintain this level and are further advised that average daily figures are to be applied to assess compliance going forward.

“The incentive which assigns a weight of 150 per cent in respect of lending to SMEs, retail, mortgage and consumer lending shall continue to apply, while failure to achieve the target shall continue to attract a levy of additional cash reserve requirement of 50 per cent of the lending shortfall of the target LDR on or before March 31, 2020.

“DMBs (Deposit Money Banks) are further encouraged to maintain strong risk management practices regarding their lending operations. The CBN shall continue to monitor compliance, review market developments and make further alterations in the LDR as it deems appropriate,” it stated.

The CBN had in July, directed commercial banks to maintain a minimum LDR of 60 per cent effective from September 30, 2019. However, at the end of September, the stipulated minimum level was raised to 65 per cent, with a fresh deadline of December 31, 2019.

The CBN had said in a letter to the banks on the lending policy that the LDR would 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.

“The CBN shall provide a framework for classification of enterprises/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 (CRR) equal to 50 per cent of the lending shortfall of the target LDR.

“The CBN shall continue to review development in the market with a view to facilitating greater investment in the real sector of the Nigerian economy,” it had stated in a circular.

The central bank policy has since unlocked over N1.5 trillion consumer and real sector lending to the economy.

CBN Governor, Mr. Godwin Emefiele, had said the credit conditions in the banking system had since improved due to the policy.
According to him, banks are now able to recover delinquent loans from customers’ accounts in other banks.

Emefiele said the measures had placed Nigerian banks in a much better position towards supporting a stronger economic recovery.