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CBN: LDR policy creates N3.33trn new loans in one year

Deposit Money Banks (DMBs) in the country created about N3.33 trillion new loans between May 2019 and June this year, primarily due to the Central Bank of Nigeria’s (CBN) Loan to Deposit Ratio (LDR) policy, findings by New Telegraph show.

 

According to data obtained from the apex bank, the policy was mainly responsible for aggregate credit first growing by N2.35 trillion between the end of May 2019 and March 26, 2020, further increasing to N3.0 trillion at the end of May this year, before hitting N3.33 trillion at the end of last month.

 

The CBN, as part of its measures to compel DMBs to increase lending to the real sector of the economy, had, on July 3, 2019, ordered lenders to maintain a minimum LDR (portion of customers’ deposit that is given out as loans) of 60 per cent by September 30, 2019, stating that failure to comply with the directive will result in a levy of additional Cash Reserve Requirement (CRR) equal to 50 per cent of the lending shortfall of the target LDR. The apex bank, which had also stated that the LDR would be subject to quarterly review, subsequently raised the LDR target upwards to 65 per cent and directed lenders to comply by December 31, 2019.

 

Global credit rating agencies, such as Fitch Ratings and Moody’s Investors Service, warned at the time that the LDR policy will be credit negative for Nigerian banks, as it would likely force them to turn on their lending tap to riskier borrowers, thereby putting their asset quality at risk.

 

But, New Telegraph’s analysis of data obtained from the CBN indicates that not only has the prediction of the rating agencies not come to pass, the policy has been key to the significant increase in lending to the private sector in the last one year. Indeed, the success of the policy has been highlighted in the communiqués issued at the end of all the meetings so far held by the CBN’s Monetary Policy Committee (MPC) this year, as well as in personal statements of some members of the Committee.

 

For instance, the communiqué issued by the MPC at the end of its March 2020 meeting, partly reads: “The Committee noted with satisfaction the growth in aggregate credit by N2.35 trillion since the inception of the LDR policy, reflecting the potency of the policy and thus urged the management of the bank to sustain the current momentum of improved flow of credit to the private sector in Nigeria.”

 

Similarly, in her personal statement at the MPC meeting held in May, the Deputy Governor, Financial Systems Stability Directorate, CBN, Mrs. Aishah Ahmad, said: “…Despite the headwinds and rapid expansion of credit (gross credit) increased by N3.0 trillion between end-May 2019 and end-April 2020 driven by the LDR policy.” Equally, at the end of its meeting last Monday, the MPC issued a communiqué which partly reads: “Aggre- Nige  gate domestic credit (net) grew by 5.16 per cent in June 2020 compared with 7.47 per cent in May 2020.

 

The Committee commended the CBN LDR initiative to address the credit conundrum as the total gross credit increased by N3.33 trillion from N15.56 trillion at end-May 2019 to N18.90 trillion at end-June 2020.”

 

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