• Tuesday, July 16, 2024
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Pressure on liquidity as banks lose public sector deposits


In recent times the banking industry has been experiencing some pressure on its liquidity position following some measure from the Central Bank of Nigeria (CBN) to curtail excess liquidity in the sector.

The measures include the increase in Monetary Policy Rate (MPR) to 13 percent from 12 percent, the increase in cash reserve requirement (CRR) of public sector deposit by 500 basis points to 20 percent from 15 percent before the past Monetary Policy Committee Meeting (MPC).

There is also the gradual phase-out of commission on turn over (COT) to zero percent per mile by the year 2016, it currently stood at one percent per mile.

Last week, the Federal Government issued a directive to government agencies, ministries and departments (MDAs) to close their revenue collection account domiciled in the deposit money banks.

“You are advised to commence the process of closing all revenue collection account with commercial banks and transfer all available balance to the Central Bank of Nigeria (CBN), Jonah Otunla, accountant general of the Federation, said at workshop on the federal government revenue e-collection project in Abuja last week.

Consequently, the MDAs were given up to 28th February, to formalise with the accountant general of the federation on how these accounts will be operated as appropriate sanction will be applied against any MDA that fails to comply.

Analysts said on Monday that although this development was healthy for the economy, it will put further pressure on banks liquidity. They are concerned that banks negate their intermediation role by not lending to the economy but place their excess liquidity to government securities.

“But for banks, it will mean further pressure on liquidity as they lose some of their public sector deposits. Combined with last year’s increase in the private sector CRR to 20 percent, this might result in further pressure on banking sector profitability – especially for those banks that were especially dependent on public sector liabilities. 

“But given that the public sector CRR already stands at 75 percent, we do not expect the impact to be severe,” Razia Khan, managing director, head, Africa Macro Global Research, Standard Chartered Bank, said in an e-mailed response to BusinessDay.

According to her, if anything, it will encourage banks to do even more to mobilise liabilities domestically – perhaps increasing the effort to mobilise deposits from the unbanked.  In the long-run, this will be a healthy development for Nigeria, boosting financial intermediation and ultimately, creating  a more resilient banking system – one that is less dependent on public sector liabilities, therefore less susceptible to volatility in the oil price.

Chukwuka Monye, managing partner, Ciuci Consulting, had said that following the trends in 2014, Nigerian banks will continue to wade through tides, finding ways to thrive amidst changes in the regulatory and business environment – with the outcome of each bank’s strategic response becoming more quantifiable.

He said with significant strains on commissions and fees income, competition in the banking industry will become stiffer and banks will continue to wrestle for low-cost deposits even as it is anticipated that Commission On Transaction (COT) rates will drop to a maximum of N1 per mile in 2015 and zero per mile in 2016.

While customer retention and acquisition remain critical to success, the need to develop more customer-centric products, provide satisfactory service experience and maximise customer value will be more emphasised.