Excess liquidity without lending puts banks under scrutiny

Nigerian lenders have come under scrutiny for inefficient services, excess charges and keeping billions of naira with the Central Bank of Nigeria (CBN) rather than lending it to various sectors of the economy, BusinessDay interactions with stakeholders have revealed.

Some analysts say the actions of the banks have continued to put pressure on the naira and encourage various infractions such as round tripping , which makes the foreign exchange market volatile.

However, this is coming on the heels of some analysts saying that despite their higher exposure to oil and gas and foreign exchange denominated lending, their cost of risk is unlikely to increase to 2009 levels.

“This is due to significantly lower exposure to margin loans which were a big driver to Non Performing Loans(NPLs) during the last crisis, higher exposure to the less vulnerable upstream sector and  stronger downstream sector, following consolidation in 2012,” says a report sent by Lorena Sanchez, “Exotix Frontier Equity Research,” to Business Day last night. 

The development, according to some analysts, has justified the continued tight monetary policy, which they say is aimed at checking the excesses of the banks.

The issue was top on the agenda at the last Monetary Policy Committee (MPC) meeting, where all 11 members  deplored dwindling lending by banks and voted for a further hike in the Monetary Policy Rate, (MPR), the anchor rate at which the CBN lends to banks to reduce amount of cash at their disposal.

Godwin Emefiele, CBN governor said at the post meeting press briefing that “Another prominent issue I considered in this respect is that the demand pressure in the foreign exchange market is invigorated essentially by the liquidity surfeit in the banking system and speculative activities. “As banks remained cautious about lending, the sturdy liquidity condition failed to bring about increased credit to the real sector to engender inclusive growth and boost employment.”

In the overwhelming vote to further hike MPR to 13 percent, from 12 percent; cash reserve ratio (CRR) on private deposits from 15 to 20 percent, while those on public deposit at 75 percent, the members said the action should be able to bring the banks back to business.

Emefiele further said, “On the demand side, the pressures in the foreign exchange market were aided mostly by the excess liquidity conditions in the banking system and speculative activities. It has become increasingly worrisome that improvement in liquidity conditions in the banking system, designed to enhance the resilience and stability of the banking system, has not translated to increased credit expansion to the real sector to engender inclusive growth and boost employment.

“Rather, it has led to an upward pressure in the foreign exchange market and Standing Deposit Facility window of the Bank (CBN) while banks continually exercise a cautious approach to lending.”

Adebayo Adelabu, in his contribution, observed that demand pressure has scaled up to an unrivalled magnitude in the last couple of weeks, adding that less than 20 per cent of the demand in the foreign exchange market was due to divestment by foreign investors, which suggests speculative demand.

“This could have only been aided by liquidity condition in the banking sector,” Adelabu said.

Sarah Alade, deputy governor, CBN, said “The banking system liquidity continues to be high, suggesting that some measure is needed to reign in the excess liquidity. Banking system deposits at the CBN deposit lending facility has consistently been high, reaching N800 billion on some days during the review.”

Dahiru Hassan Balami, also a member of the MPC said, “The reason for raising CRR is that DMBs are holding excess reserve averaging over 300 billion.”

Suleiman Barau, said, “Industry liquidity in the context of declining reserves and exchange rate concern, remains a pressure point for the MPC.”

Anastasia Daniel-Nwaobia said, “The main challenges to monetary policy currently, are excessive liquidity in the banking system, pressure on the exchange rate and decline in external reserves. Consequently, strategic efforts need be made towards addressing the issue of high interest rates, as well as ensuring the flow of credit to the real economy, in order to engender growth and create employment.

Stanley Lawson said, “available data also indicate that banking system liquidity has been lavishly deployed in pursuit of speculative foreign exchange trading at the short-end of the market.”

CRR is best used to create a stable demand for reserves consistent with the level of systemic liquidity. Some countries like China and Brazil have used high CRR ratios, mainly to sterilise substantial capital inflows in the context of managed foreign exchange rate regimes.

However, most countries keep this ratio low and stable, since an increase in the CRR, particularly when it is unremunerated, imposes additional costs on banks, which then get passed on to the economy in the form of wider interest rate spreads.

It is estimated that where banks have constant costs per unit of deposit, a 2 percent increase in the level of the CRR adds approximately 0.5 percent to the spread between deposit and lending rates.

John Omachonu