CBN reduces banks’ daily excess cash deposit by 73.3% to N2bn

The Central Bank of Nigeria ( CBN) on Wednesday reduced the amount of excess cash that banks and merchant banks (discount houses) deposit with it, which is known as Standing Deposit Facility (SDF), by 73.3 percent to N2 billion from N7.5 billion since 2014.

In a circular, FMD/DIR/ CON/OGC/12/019, to all banks and discounts houses on ‘Guidelines on Accessing the CBN Standing Deposit Facility’ and signed by Angela Sere-ejembi, director, financial markets department, the CBN said the remunerable daily placement shall not exceed N2 billion.

The circular published on the CBN’S website yesterday stated that the SDF deposit of N2 billion shall be remunerated at an interest rate prescribed by the Monetary Policy Committee (MPC) from time to time.

“Any deposit by a bank in excess of N2 billion shall not be remunerated,” the CBN said in the circular which takes effect from today July 11, 2019. Reacting to the development Uche Olowu, president/chairman of council, Chartered Institute Bankers Committee (CIBN), said the CBN is trying to change the behaviour of banks towards lending to the real sector of the economy. Olowu who spoke with Businessday by phone said banks have to look for an alternative way of making sure they direct credit to the real economy. “We are going to be better for it as we are going to have the productive sector to put the excess cash,” the CIBN president added. Before now, banks have had preference for keeping their idle funds with the CBN as well as transacting on government securities rather than lending to the productive sector.

Ayodele Akinwunmi, head of research, FSDH Merchant Bank Limited, said this means that the amount of excess money that Nigerian banks can place with the Central Bank of Nigeria ( CBN) to earn overnight interest rate of 8.5% per annum has been reduced from N7.5 billion to N2billion. Any amount in excess of N2billion will not earn interest income for banks. “This, in a way, will reduce the interest income of banks going forward. It will also force banks to trade more with one another in the interbank market than before”, Akinwunmi said. He said It may also reduce the cost of managing system liquidity for the CBN as the apex bank will now have access to more funds from the banking system at no cost than before. In addition, interbank interest rates may drop further as a result of increased system liquidity.

This is part of the efforts of the CBN to increase banks’ credit to the real sector of the economy in order to stimulate growth of the economy. In his response, Ayodeji Ebo, managing director, Afrinvest Securities limited said, this is another regulatory pressure on the banks in a bid to get them to lend. The reduction of the SDF from N7.5bn to N2.0bn may lead to revenue loss (8.5% on N5.0bn in a year is N425m assuming the average deposit placed with the CBN daily N7.5bn and above). This may not translate into improved lending as the banks will prefer to earn zero interest on their funds than risk the funds.