How CBN’s new lending guidelines will reshape banking sector

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A new lending directive in Nigeria holds the promise of boosting commercial bank credit to cash-strapped businesses but puts the loan book quality of the lenders at risk.

The Central Bank of Nigeria (CBN) on Wednesday said it was mandating deposit money banks to have a Loan to Deposit Ratio (LDR) of 60 percent by the end of September 2019 in an effort to force banks to lend in an economy still reeling from a contraction in 2016 that caused bad loans to surge.

The new directive means banks must use at least 60 percent of their deposits for loans, 150 basis points higher than the industry average of 58.5 percent as at May.

According to the apex bank, a failure to meet the minimum LDR of 60 percent by the specified date will result in a levy of additional Cash Reserve Requirement (a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves with the central bank) equal to 50 percent of the lending shortfall of the target LDR.

The LDR is a ratio between a bank’s total loans and total deposits, and is generally expressed in percentage terms. A high loan to deposit ratio means that the bank is issuing out more of its deposits in loans and vice-versa.

“On one hand, this is a good development that should encourage banks to increase their lending, especially to the private sector,” said Taiwo Oyedele, an economist and head of tax and regulatory services at PricewaterhouseCoopers (PwC).

“On the other hand, the risk is that the quality of banks’ loan portfolio may deteriorate in an attempt to meet the target at all cost thereby resulting in relatively high non-performing loan ratio,” Oyedele said. “The CBN therefore needs to ensure … Read More...