Banking system liquidity at N450.0bn exceeds regulatory benchmark in May

Nigeria’s banking system liquidity moderated but remained buoyant at N450.0 billion in May 2020, exceeding the Central Bank’s benchmark of N313.8 billion.

This was due to the net effects of the Loan to Deposit Ratio (LDR) policy and the Cash Reserves Ratio (CRR) debits on banks aimed at strengthening credit to other sectors of the economy.

The CBN’s economic report for the month of May 2020, revealed that there was a net decrease in liquidity, with the industry position closing at an average of N368.90 billion compared with N518.84 billion in April.

Withdrawals from the banking system arose from provisioning and settlement of foreign exchange purchases, auctioning of CBN Bills, FGN Bonds and Nigerian Treasury Bills (NTBs) as well as CRR debits. The industry liquidity position was moderated through the reduction in repayment of matured CBN bills, Nigerian Treasury Bills (NTBs) and fiscal disbursements to the three tiers of Government. A classification of the various liquidity instruments showed open market operations (OMO), primary market activities and standing facilities as the main sources.

Despite the downturn in the global financial markets, oil market challenges, and capital flows constraints, the domestic financial sector remained stable in the review period, as shown by key financial soundness indicators.

The health of banks was generally sound although their asset quality, measured by the ratio of Non-Performing Loans (NPLs) to industry total outstanding loans, at 6.5 per cent in May 2020, surpassed the 5.0 per cent prudential benchmark. At 14.9 per cent, Capital Adequacy Ratio (CAR) remained unchanged from the level at end-April and exceeded the regulatory benchmark of 10.0 per cent. The liquidity ratio, at 37.8 per cent, has continued to decelerate in response to the implementation of the LDR policy, but remained above the 30.0 per cent threshold.

Private sector credit in May was driven largely by other depository corporations’ credit; hence, reinforcing the effectiveness of the Loan-to Deposit ratio policy of the regulator.

Bank credit to the private sector grew by 8.1 per cent in May compared with 7.3 per cent in April. This was driven, largely, by other depository corporations’ credit. Sectoral credit utilisation by the ‘other sectors of the economy at N18.63 trillion, rose by 0.53 per cent over its level at end the end of April 2020.

Analysis of the composition of the credit indicated that industrial and services sectors constituted 37.5 per cent and 38.5 per cent of the total allocation; a slight decline from 37.3 per cent and 38.4 per cent a month earlier. Agricultural and construction sectors accounted for 4.6 per cent and 4.5 per cent in May 2020, respectively, compared with their respective shares of 4.7 per cent and 4.5 per cent in the preceding month.

Consumer credit outstanding, at N1.34 trillion, declined by 11.0 per cent below the level in April. At that level, outstanding consumer credit constituted 8.1 per cent of claims on private sector. The decline was due to the lull in economic activities caused by the COVID-19 pandemic. The breakdown of consumer loans indicated that personal loan advanced to customers with low risk of default dominated consumer credits.