CBN’s LDR policy drives N6.6trn growth in gross credit to real sector in 2 years
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Exactly two years after the Central Bank of Nigeria (CBN) implemented the 65 percent loan-to-deposit (LDR) policy for commercial banks in 2019, the policy has lived up to expectation driving improvement in deposits across the banking sector, as well as credit into the real sector of the nation’s economy by N6.63 trillion.
This information is contained in a communiqué published by the monetary authority on its website ahead of the final monetary policy committee (MPC) meeting for the year 2021 that is expected to be held in November.
According to the MPC communiqué, gross credit to industries increased by N6.63 trillion from N15.57 trillion at end-May, 2019 to N22.20 trillion at end-July, 2021 with the chunk being recorded in the manufacturing, oil and gas and agriculture sectors, and driven, primarily, by the introduction of the loan to deposit ratio policy.
The LDR ratio is a liquidity ratio used to ascertain the liquidity of a bank by comparing its loans to its total deposits for the same period. It shows a bank ability to cover loan losses and withdrawals by its customers. This is a tool used by investors to keep track of banks in order to ensure that there is adequate liquidity in the event of an economic downturn that could lead to loan defaults.
The communiqué showed that the apex bank’s policy committee welcomed the improvement in the level of non-performing loans (NPLs) ratio which stood at 5.4 percent in July 2021, from 5.7 percent in June. The CBN was, therefore, urged to sustain current efforts to bring NPLs below the 5.0 percent prudential benchmark as they noted that the capital adequacy ratio (CAR) and the liquidity ratio (LR) both remained above the prudential limits at 15.2 and 41.7 percent, respectively at end-July 2021
Also, the committee observed that broad money supply (M3) rose to 5.83 percent in August 2021, compared with 2.91 percent in July 2021. The increase in broad money supply was largely driven by the growth of Net Foreign Assets (NFA) and Net Domestic Assets (NDA) by 12.35 percent and 4.30 percent respectively in August 2021, compared with 1.84 percent and 3.17 percent in July 2021. It added that the growth in net foreign assets was largely driven by an increase in six foreign asset holdings of commercial and merchant banks.
In the same vein, it said the increase in net domestic assets reflects the boost to aggregate net credit, which increased to 8.14 percent in August 2021, from 5.71 percent in July 2021.