• Monday, December 11, 2023
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BusinessDay

CBN’s CRR hike to mop banks’ liquidity by extra N1.6trn

CBN goes after politically exposed bank customers

The recent hike in the cash reserve ratio (CRR) of deposit money banks from 27.5 percent to 32.5 percent by the Central Bank of Nigeria (CBN) will take the portion of customers’ deposits not available for lending to over N10 trillion, BusinessDay’s findings have shown.

At the old CRR of 27.5 percent, a total of N8.88 trillion will not be available for lending out of the N32.3 trillion deposits of the five largest banks in Nigeria as of June 2022, and that amount has now been increased by an extra N1.6 trillion at the new rate of 32.5 percent, implying a total of N10 trillion will not be available for lending in line with the CBN requirements.

Bankers say the effective CRR rate would be higher than the new rate and closer to 50 percent, a situation they have had to endure even when the CRR rate was 27.5 percent but the effective rate was around 40 percent.

As of June 2022, the five tier-one banks in the country – Access Bank, First Bank, Guaranty Trust Bank, United Bank for Africa (UBA), and Zenith Bank, mobilised N32.29 trillion deposits from customers, 8.9 percent higher than N29.66 trillion deposits in their coffers as of December 2021.

Rising from the Monetary Policy Committee (MPC) meeting on September 27, 2022, Godwin Emefiele, governor of CBN, said the decision to raise the CRR was unanimously taken by the MPC members.

“Members deliberated on the impact of the widening margin between the current policy rate of 14 percent and the inflation rate of 20.52 percent. At this meeting, the option to loosen the policy rate was not considered as this would be gravely detrimental to reining-in inflation. The committee thus agreed unanimously to raise the policy rate to narrow the negative real interest rate gap and rein in inflation,” Emefiele said at the end of the meeting.

CRR is the proportion of commercial banks’ deposits that is not allowed to be lent out or invested by banks. At the current rate, the CBN wants banks to keep N325 out of every N1,000 deposit mobilised from customers.

Lagos-based Financial Derivatives Company Limited said the CBN opted for a hike in CRR in order to rein in inflation, moderate the speed of capital flight, boost the propensity to save and increase capital inflows.

Applying the new CRR on the tier-one banks’ deposits as of June 2022, they will now have to keep N10.49 trillion in their coffers which must not be invested or lent to their customers.

Access Bank Holding Company mobilised N7.34 trillion deposits as of June 2022, higher than N6.95 trillion as of December 2021 by 12.7 percent. Out of these deposits, the bank gave out N4.62 trillion as loans and advances, resulting in a loan-to-deposit ratio (LDR) of 58.9 percent.

FBN Holdings Plc, the holding company for First Bank of Nigeria Limited, mobilised N6.30 trillion worth of customer deposits, representing an increase of 7.8 percent over N5.85 trillion deposits as of December 2021. The bank gave out N3.38 trillion worth of loans and advances, resulting in an LDR of 53.6 percent.

Guaranty Trust Holding Company had N4.26 trillion worth of deposits from customers as of June 2022, which increased by 6.2 percent from N4.01 trillion as of December 2021. Its total loans and advances amounted to N1.83 trillion, resulting in an LDR of 43 percent.

UBA mobilised N6.73 trillion deposits at the end of the first half of 2022, representing a 5.7 percent increase over N6.37 trillion as of December 2021. Its loans and advances to customers stood at N2.75 trillion as of June 2022, with an LDR ratio of 40.9 percent.

Zenith Bank recorded N7.15 trillion deposits as of hal2022, 10.5 percent higher than N6.47 trillion deposits as of December 2021. It gave out N3.49 trillion worth of loans and advances, resulting in an LDR of 48.9 percent.

Read also: CBN’s bumper rate hike worries manufacturers, others

Analysts have said that the recent CBN actions will have negative effects on borrowings, investments and exports.

“Whenever interest rate rises, credit facilities from financial institutions come at a higher cost. It will also affect Nigeria’s ability to export because higher cost of capital limits a firm’s ability to produce, which means most of the nation’s industries will be forced to deploy lesser resources while some will rethink their expansion plans,” Abdulrauf Aliyu, co-founder of Fringe Insight, Kaduna State, said.

CardinalStone, an investment firm, said in a note that the CBN decision would lead to a surge in primary market auction stop rates and yields, as well as continued bearish sentiment in the Nigerian equity market.

It said: “The CBN’s latest rhetoric suggests an increasing intolerance for high system liquidity, with banks directed to fund their CRR accounts or face penalties such as being barred from assessing FX at the CBN windows.

“Consequently, we see latitude for continued monetary policy hawkishness in the coming months, especially considering the MPC’s concerns about the potential impact of election-related activities on spending, currency, and inflation and the need to improve carry trade.”

Analysts at Afrinvest believe the CBN move will not effectively curb deterioration in price level if the apex bank continues financing the fiscal deficit of the federal government.

“While the CRR increase would aid disinflationary moves, banks’ ability to sweat out assets would further be dampened, while cost of borrowing for businesses would race to new highs. We believe the move would be less effective if the CBN continues to finance FG’s deficit, tighten supply, and manage market yield,” Afrinvest said.