CRR reduction to restore liquidity in banks after TSA effect

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) on Tuesday unanimously left the MPR unchanged at 13 percent +/- 200 basis points around the symmetric corridor with a 7 to 3 vote, reduced Cash Reserve Requirement (CRR) from 31 percent to 25 percent to reflate banking sector liquidity.

Analyst see this move by CBN to restore liquidity in the banking sector and neutralise the effects of the Treasury Single Account (TSA), implemented 15 September, as directed by the Federal Government.

“We think the CBN has simply restored system liquidity levels to where they were pre TSA debits, by releasing to the banks the Naira equivalent of what moved to the TSA,” Renaissance Capital said in its recent note.

“This is positive for the banks because there were significantly more FX TSA debits than Naira last week; which implies that more Naira earning assets should be supportive of asset yields near term,” Rencap further said.

Earlier in February, the Central Bank of Nigeria issued a circular directing all deposit money banks to implement the Remita e-Collection Platform.

The Remita e-Collection is a technology platform deployed by the Federal Government to support the collection and remittance of all government revenue to a Consolidated Account domiciled with the CBN.

TSA provides mechanism for proper monitoring of government receipts and expenditure. It helps to block leakages that have been the bane of the growth of the Nigerian economy.

Analysts have estimated up to 1.2 trillion naira ($6.03 billion), or 10 percent of banking deposits, was taking out of the banking system through the TSA. This has dried up liquidity in the interbank market.

A core reason attributed to the CRR easing by the policy makers was to see that banks invest more in critical sectors such as agriculture and mining which will help drive growth and reduce unemployment. Economic growth dropped to 2.35 percent in the second quarter from 6.54 percent a year earlier.

But analysts have said banks will not be investing in critical sector like agriculture and mining in the short term to stimulate growth amid falling industry output and rising unemployment.

According to Rencap, “We do not see this happening near term and think the decision of the MPC is likely to put downward pressure on treasury yields as banks aggressively invest the released CRR in T-Bills and bonds.”

“We should see improved return on assets. We think the improvement in RoA should more than offset the decline in gearing post TSA implementation, leading to improved sector RoEs – this should be supportive of valuations.”

Cash Reserve Ratio (CRR) is the minimum fraction of the total deposits of customers which banks have to hold as reserves, either in cash or as deposits with the central bank.

Despite analysts giving thumbs up to the Central Bank over its downward review of the cash reserve ratio to 25 percent.

International ratings agency, Fitch, has said “cutting reserve requirements will not add liquidity to the Nigerian banking system because it releases no additional foreign currency.”

Josephine Okojie