By Babajide Komolafe & Emma Ujah
The Central Bank of Nigeria (CBN) said it will increase the minimum Loan to Deposit Ratio (LDR) of banks to 70 percent by 2020.
Deputy Director, Financial Policy & Regulation Department, CBN, Hassan Mahmoud, disclosed this while speaking at the 2019 workshop for Finance Correspondents and Business Editors organised by the Nigeria Deposit Insurance Corporation, (NDIC) in Yola, Adamawa State.
Recall that the apex bank in May introduced 60 percent minimum LDR for banks, with the aim of boosting lending to the private sector, especially the small and medium enterprises (SMEs). The ratio was further increased to 65 per cent in September with December 31st 2019 as deadline for compliance.
Bello said the measure has enhanced credit into the economy.
He stated: “The CBN increased the minimum loan-to-deposit ration to encourage banks to lend and de-risk the real sector, particularly the SMEs. This is to encourage employment. Now, we are thinking of doing 70 per cent by the end of next year. Within the period that we have increased the LDR, industry lending has increased by over N1.1 trillion.”
He said the apex bank has also introduced the Global Standing Instruction (GSI) to complement the minimum LDR directive, adding that this allows banks to use funds of a loan defaulting customer in any other bank, to settle his/her loan obligation.
He stated further: “What we also did in the system to strengthen banking system stability, is the fact that so long as you are owing a bank, let us say you have N1 billion in one bank and you went to another bank to borrow N1.5 billion and you leave that to go to another bank to borrow another N1 billion, without paying the loans you collected, the new policy is that as long as you default, where you have money in any bank, the bank you are owing can take the money in any of your account that you have money. You would have been made to sign the agreement before taking the loan. That is one of the measures to guard against risk in the system.
“Yes, there are vulnerabilities, but we do not foresee any systemic challenges in the banking industry, that would jeopardize the banking system.”