CBN’s new lending policy for economic growth, may turn out to be a nightmare for some tier 1 banks.   

05 July 2019 : CBN recently introduced a new lending policy to ensure economic growth by correcting market anomalies, through investment in the real estate sector.

The penultimate bank has set a minimum of 60% loan-deposit ratio ( LDR ) and a failure to meet the same could cause the banks a cash reserve penalty, equivalent to 50% of the lending shortfall of the target loan to deposit ratio.The cash reserve is certain of amount that commercial banks deposited with the apex bank.

Due to constant bad debts and inflated NPL. This new policy will push the bank into a tight corner and will result in commercial banks to lend to the real sector or face stiff sanction.

The apex bank also stated that this move is to encourage lending to small businesses and consumers and more mortgages, these sectors shall be assigned a weight of 150% in computing the LDR. “All deposit money banks are hereby required to maintain a minimum Loan to Deposit Ratio (LDR) of 60% by September 30, 2019. “This ratio shall be subject to quarterly review.”

What about the Banks? How do they feel about this?

LDR is a value by which a bank’s ability to cover loan losses and withdrawal by customers can be measured. It is used to make sure the bank poses enough liquidity to cover loans in case of an unforeseen downturn in loan defaults.

According to Abimbola Omotola, Fixed Income and Currency specialist at Ecobank Research “The policy has been implemented as banks liquidity ratio increase primarily because CBN noticed banks have been accumulating government securities(a lot of OMO bills) while lending to the private sector decreased.

“Credit has not been flowing very well in the real sector in the last five years and this is just a policy to correct the anomalies,”. He also mentioned that massive banks have a higher LDR ratio than the CBN requirement and only a couple of tier-one banks will be truly affected.

Reporting for EasyKobo on Friday , 05 July 2019 in Lagos, Nigeria

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