CBN debits banks of CRR worth N926.4bn for breaching lending requirements

The Central Bank of Nigeria (CBN) last week debited banks of Cash Reserve Ratio (CRR) worth N926.4 billion for breach of its lending policy – Loan to Deposit Ratio (LDR).

Zenith Bank Plc, UBA, and Access Plc, led other financial institutions with a total deduction of (N290bn), Plc (N160b), and (N140bn) respectively.

Other banks affected in the CRR deduction include FBN (N95bn), GTB (N55bn), Polaris (N30bn), Keystone (N30bn), Standard Chartered Bank (N24bn), Fidelity (N15bn), FCMB (N11bn), Ecobank (N11bn), Stanbic (N10bn), WEMA (N10bn), Coronation (N3.9bn), Sterling (N8bn), Citi (N6bn), Union (N5bn), Providus (N5bn), RMB (N5bn), FSDH (N1.5bn), NOVA (N1bn) Globus (N3bn), Unity (N7bn), Suntrust (Nil), Heritage (Nil), Titans (Nil), and FBN Quest (Nil).

With this deduction, the Apex bank has debited a total of N1.4 trillion from the banks in one month. On October 9, 2020, the regulator debited banks of CRR worth N462.7 billion for breach of its lending policy.

On June 2019, the Central Bank announced a new policy measure, which required Deposit Money Banks (DMBs) to maintain a minimum 60 percent Loan to Deposit Ratio (LDR).

The objective was to grow the economy through making credit available to the real sector of the economy.

This, the regulator later raised to 65 percent and set December 2019 as deadline for compliance by banks.

Loan to Deposit Ratio is a ratio, represented in percentage, between a bank’s total loans and total deposits.

“We give them incentives that when they lend to the Small and Medium Enterprises (SMES), and private sectors, they will be granted certain dispensations to make them happy while failure to comply will result into taking 50 percent of the un-lent portion of their loans into the CRR,” Godwin Emefiele, governor of the CBN said.

In July 2019, the CBN wielded the first big stick on 12 banks for LDR default to demonstrate its determination to jumpstart the economy. The regulator deducted N500 billion from the accounts of 12 banks for failing to meet the target to provide credit to their customers.

The deduction will continue to increase the effective CRR beyond the statutory threshold and limits the ability of the banks to consider other likely potential income positions, according to Nigeria’s Economist and Investment Professional.

What the deduction means for the sector is that it puts pressure on the Net Interest Margin of the banks as these funds earn zero interest with the CBN, the Economist said.

This is responsible for the low deposit rates in the banks as banks may be wary of taking deposits. On the positive side, the economist said the low interest rate has shifted investors focus to other asset classes with higher yield which aligned with the CBN’s position.

The CBN at the first meeting of the Monetary Policy Committee (MPC) on January increased the CRR to 27.5 percent from 22.5 percent. The increase then was as a result of concerns on the excess liquidity in the banking sector, occasioned by open market operations (OMO) ban for non-bank investors and corporates.

In March this year, the CBN deducted a whopping N1.4 trillion from the banking sector’s CRR as all DMBs and Merchant banks failed to meet the 65 percent LDR at the end of March 2020.

Olusegun Akintunde, financial market analyst at Polaris Bank Limited, said the impact has always been the same, squeeze the system of liquidity and impact the ability of banks to bid for FX in size.

On June 2020, the CBN debited banks the sum of N216bn for the same reason. One of the major implications of the CRR debits for deposit money banks is the adverse material impact on their liquidity ratios, FBNQuest said in a note in June 2020.

On July 2020, the CBN debited banks an additional sum of N118bn for breaching its CRR requirements.

The higher CRR is in line with the CBN’s liquidity mopping efforts which have intensified this year amid rising inflation.

The MPC noted in its last meeting that the CBN policy measures have assisted in boosting credit to the agricultural and manufacturing sectors.

Total gross credit to the economy grew by N3.3 trillion or 21.5 per cent to N18.9 trillion at the end of June 2020, from N15.56 trillion recorded in May 2020, according to the CBN.