Loans to SMEs may decline as CBN reduces Loan-to-Deposit Ratio

The recent announcement by the Central Bank of Nigeria (CBN) states that the Loan-to-Deposit Ratio (LDR) of commercial banks has been reduced from 75 percent to 50 percent, marking a decrease of 25 percentage points. The LDR, a tool utilized by the CBN to impact the lending practices of commercial banks, represents the ratio of a bank’s total loans to its total deposits.

A lower LDR signifies that banks will lend out smaller portions of their deposits, and conversely. The decision of the central bank to lower the LDR value is part of its strategy to uphold monetary tightening within the economy. This adjustment indicates that banks will maintain a larger proportion of their deposits as reserves, potentially enabling them to fulfill short-term obligations and unforeseen withdrawals.

Furthermore, banks will now prioritize creditworthy borrowers and encounter reduced pressure in meeting the CBN’s requirements. Nevertheless, this change will result in a reduction in the overall credit accessible to Micro, Small, and Medium Enterprises (MSMEs) that frequently rely on banks for loans. With a diminished flow of funds into productive sectors of the economy, combined with the recent elevation of the Monetary Policy rate (MPR) to 24.75%, economic growth may face significant obstacles.

Therefore, it is crucial for the central bank to explore additional measures to counteract the adverse impact of this development on the real sector. This could involve implementing incentives to motivate banks to lend to vital sectors of the economy such as agriculture and manufacturing.