N300bn loanable funds hanging as CBN offers juicy rates to banks

Higher interest paid by the Central Bank of Nigeria (CBN), currently at 10 percent, on funds placed at its Standing Deposit Facility (SDF) window is preventing banks from lending to the critical sectors of the economy, BusinessDay investigations have revealed.

This development, analysts say, will jeopardise the current campaign by the apex bank to encourage banks to lend to the economy, including its various intervention mechanisms whereby funds are directly disbursed through the Bank of Industry (BOI) and other deposit money banks (DMBs) to sectors like agriculture, aviation and agro-allied industries, among others.

With over N300 billion in the vaults of banks without lending to the economy, the analysts say the implication will be continued pressure on the naira, with the accompanying adverse effect on the CBN’s monetary policy measures.

At the last Monetary Policy Committee (MPC) meeting, Godwin Emefiele, CBN governor, said the committee was concerned that banks were holding large excess reserves, averaging over N300 billion, even when there were ample opportunities for productive and profitable lending to the real sector of the economy.

“The concern was further strengthened by the reality of injecting an additional N866 billion into the system through the redemption of maturing AMCON bonds in October,” Emefiele said.

“Given the apathy to lending, banks may be inclined more to placing these new funds in the SDF or use them to increase pressure on the exchange rate. The committee advised the bank to explore ways of encouraging banks to lend such excess reserves to the real sector,” he said.

As a way out, some analysts are calling for the review of the mouth-watering rate offered by CBN, which is the current monetary policy rate (MPR) at 12 percent, less two basis points. They argue that the continued payment of the 10 percent by CBN will have a negative impact on its balance sheet.

The discount window is an instrument of monetary policy that allows banks to borrow money from the CBN, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions, with the aim of managing unexpected payment shocks which may arise due to technical problems in the bank’s own systems, or in the market-wide payments and settlement infrastructure.

Another role of the facility is providing an arbitrage in normal market conditions to prevent money market rates moving far away from bank rate, which is usually called standing lending facility.

Ayodeji Ebo of Afrinvest says the exciting interest rate received (MPR minus 2.0 percent) on deposits placed at the CBN has continued to lure the banks to place funds at the CBN Standing Deposit Facility (SDF) window, rather than lend to the real sector.

“Afrinvest Research has been clamouring for a reduction in the SDF from 10.0 percent to 8.0 percent to discourage banks from placing funds at the discount window. On the other hand, the interests paid by the CBN on the deposits constitute a huge expense to the apex bank, hence accumulating a burden in its income statement. In addition, the real sector needs to be de-risked by the Federal Government to foster lending to various segments of the economy,” Ebo said.

Friday Ameh, an energy analyst, said the CBN had no reason for not taking measures to tackle the problems it has likewise acknowledged.

“From experience, the banks will continue to explore safe and cheap investment options to maximise profit. Doling out intervention funds without monitoring is still not good enough,” he said.

Razia Khan, analyst at Standard Chartered Bank, London, said banks were already flush with liquidity.

“AMCON bond maturities in October will pressure market liquidity further. According to the CBN, banks currently hold large excess reserves averaging over N300 billion, but are reluctant to lend to the real sector,” Khan said.

“Although AMCON bonds maturing in October (worth NGN 866 billion) are likely to be paid out in government securities, partly sterilising the liquidity impact, the NGN may nonetheless come under further pressure,” she said.

Khan said the CBN had outlined broad plans for concessional lending to strategic sectors to boost import substitution, adding, however, that such measures would likely be effective only in the medium term.

“The initial surge in lending and market liquidity may offset future FX benefits,” she said, further observing that Nigerian banks now had higher exposure to foreign exchange, with their foreign-currency assets exceeding their liabilities by 30 percent, as at the end of H1-2014.

“While this makes the authorities less likely to support potentially destabilising FX depreciation, it also magnifies risks to the FX rate, if other factors should trigger naira weakness,” she said.

Bismarck Rewane, chief executive, Financial Derivatives Company (FDC) Limited, said in a bid to redeem about N860 billion worth of bonds that mature in October, the Asset Management Corporation of Nigeria (AMCON) sold its 12.5 percent and 20.9 percent stake in ETI and UBN, respectively, for about $475 million.

Rewane said in his September monthly publication that the Qatar National Bank (QNB) acquired a 23.5 percent stake in ETI in two tranches within the month, while Atlas Mara paid $275 million for a 20.9 percent stake in Union Bank of Nigeria plc (UBN). Likewise, the Arab Bank acquired a total of 3.4 billion ordinary shares and 732 million preference shares of ETI to become a significant shareholder in ETI.

John Omachonu