An analysis by a security firm, Cordros Securities shows that the release of foreign exchange is only anticipated to have a minor effect on banks’ lending-to-deposit ratios.
According to The Punch, the security company said that the CBN’s proposal to re-enforce LDR could hurt Tier 1 banks, forcing them to revalue their loans and deposits in foreign currencies.
“Interestingly, the LDR re-enforcement comes at a time of sharp FX depreciation, implying that loans and deposits in foreign currencies will have to be revalued,” the study stated.
It was stated that on July 24, 2023, the Central Bank of Nigeria sent individual circulars to Deposit Money Banks to reiterate its resolve to not only maintain the minimum LDR at 65 percent but also to resume enforcing this regulation as of July 31, 2023.
In light of this, it was emphasized that DMBs that disregarded the requirement from the start would be subject to an extra Cash Reserve Requirement of around 50%, charged on the lending deficit implied by the target LDR (i.e., 65% – DMBs LDR).
It went on to say that the central bank’s circular specifically stated that the policy’s goal was to manage the financial system’s excess liquidity.
Additionally, it added, “The CBN stated that when it first imposed this directive, this policy would assist in bridging the credit deficit and strengthen Nigeria’s real sector.
The analysis of Cordros’ opinions on the potential effects of the policy on banks covered by it was done in the report.
According to Cordros, “All the banks we cover consistently violate the CBN’s 65 percent minimum LDR directive according to our analysis of DMBs’ compliance.”
For context, the LDR for tier 1 banks in the three years following the CBN’s introduction of the directive (2020) averaged 50%, which was below the 65.9% industry average. Additionally, early data for 2023 support the aforementioned.
