In July 2019, the Central Bank of Nigeria (CBN), intensified efforts to ramp up real sector credit by imposing a minimum Loan-to-Deposit ratio (LDR) of 60.0 percent on Deposit Money Banks (DMBs), with a Sept 30th deadline.
However, rather than simply penalizing the banks as hinted earlier, the minimum ratio was revised upward to 65.0 percent, with a new deadline of Dec 31st, 2019. Also, a new weight of 150 percent was attached to credit extended to the consumer lending, mortgage, and retail sectors.
At first glance, the new deadline was viewed as an extension, but contrary to this, DMBs that failed to meet the initial 60.0 percent deadline by September 31st were penalized.
At first glance, the new deadline was viewed as an extension, but contrary to this, DMBs that failed to meet the initial 60.0 percent deadline by September 31st were penalized.
Accordingly, a total of 499.2 billion naira was debited from 12 banks found wanting, the majority being Tier-1 and International banks.
With the pace of policy directives targeted at the banks, there are growing concerns as to what this means for the financial system.
With the pace of policy directives targeted at the banks, there are growing concerns as to what this means for the financial system.
First, is the risk of the banks aggressively crashing lending rates to meet up the new limit before the deadline and consequently impairing their asset quality. Secondly, at 65.0 percent, the CBN’s next action is unclear, considering that prudential maximum LDR is set at 80 percent, while regulatory cash reserve (CRR) and liquidity ratios are pegged at 22.5 percent and 30.0 percent respectively. Finally, the CBN’s effort to spur real sector credit remains commendable, however, the fragility of the macro-environment calls for caution.
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