In the game of high jump, the bar is moved higher until a winner emerges, it appears the Central Bank of Nigeria has taken a leaf from the pages of this sport. The CBN isn’t satisfied with the number of loans given out by banks so it’s increasing the loan to deposit ratio (LDR) – the ratio between the banks total loans and total deposits – of banks from 60% to 65%.
Backstory: In July, The CBN ordered banks to increase their LDRs to 60% or punish banks that fail to comply with this directive by increasing the compulsory amount they have to keep (Cash reserve ratio) with the CBN from 22.5% to 50%. This means 50% of a bank’s deposit will be sent to the CBN.
And true to its word, 12 banks have already been fined N499 billion for failing to meet the earlier set target of 60% LDR set by the CBN.
Mitigating Risks involved: While this move is targeted at stimulating the economy by making more loans available to more business sectors, a downside of the 65% LDR is that it would force banks to lend to some vulnerable sectors.
In order to mitigate the risks involved the apex bank has granted approval for Banks to retrieve funds from loan defaulters’ other bank accounts. This means, for example, if you are defaulting a GTB loan, GTB can obtain the defaulting amount from your First Bank account and any other Bank account you have. Thanks to BVN.