CRR deductions won’t make banks lend, improved economic activity will

The recurrent debits of banks’ CRR by the Central Bank of Nigeria isn’t sufficient enough to force banks to extend loans to the real sector, particularly the Small and Medium Scale Enterprises (SMEs) given the precarious condition of the Nigerian macroeconomy.

Last week, the Central Bank of Nigeria (CBN) debited banks of Cash Reserve Ratio (CRR) worth N926.4 billion for breach of its lending policy – Loan to Deposit Ratio (LDR). The LDR policy mandates banks to extend 60 percent of customers’ deposits as credit/loans to the real sector. The policy is in a bid to boost spending and investment in the economy for business expansion with positive ripple effects on economic growth.

However, given the reality of the present day economy, banks have shown so far that they would prefer to opt for a 50 percent of the un-lent portion of their loans deducted than to risk writing off huge amounts of bad debts amid a high risk environment.

“I think the banks are just opting for the ‘lesser evil’,” Damilare Asimuyi, Head of Research, GTI, told BusinessDay.

He added that about N1.2 trillion debt has been written off by banks in the last 10 months. “This is really huge. CBN debiting them does not mean they have completely lost the money. It will be returned once they meet the ratio the following quarter.” Asimuyi said.

The year 2020 has been a tough year for lots of businesses following the outbreak of the COVID-19 pandemic in Nigeria which necessitated swift response from the federal and state governments to impose lockdown measures. Coupled by a sharp slump in crude oil price which saw Nigeria’s foreign reserves depleted, Nigeria’s GDP contracted by 6.1 percent in the second quarter of 2020.

To boost economic growth, it is logical for the CBN to “force” banks to lend, however, performing a financial intermediation role in a stagflated economy may affect the books of banks in the form of high non-performing loans.

Despite increasing unemployment rate and negative economic growth, inflation has accelerated to 13.7 percent reflecting the closure of the land borders and COVID-19 induced disruption in supplies.

Hence, risk of lending to businesses and individuals in an economy with high inflation, weak economic outlook, and policy uncertainty is higher and banks are not willing to take this.

“Heightened risks to asset quality due to the fragile state of the economy will constrain banks from creating risky assets. They will prefer to bear the regulatory charge associated with non compliance instead of expanding their loan book,” Gbolahan Ologunro, Senior Analyst with Cordros Capital told BusinessDay.

However, the recurrent debits from banks by the CBN isn’t without consequences. The loss of liquidity which could have been utilized to boost income would affect banks’ Net Interest Margins.

“The impact of Nigeria’s low yield environment will be amplified on banks Interest Income and by extension Net Interest Margin given the little liquidity left to profit with,” Ologunro explained.

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.

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.

In June 2020, the CBN debited banks the sum of N216bn for the same reason. In July 2020, the CBN debited banks an additional sum of N118bn for breaching its CRR requirements.

The frequency and magnitude of the debits may also suggest that it is used as a tool in managing system liquidity and constraining speculative activities against the Naira. Squeezing the system of liquidity will impact banks’ ability to bid for FX in size.

The move of the CBN against banks which failed in meeting a 65 percent LDR is detrimental to banks interest margin and liquidity ratios. Also, banks’ refusal to lend to the real sector will also impede economic recovery given the share of the real sector in the nation’s GDP and impact.

Analysts suggest prioritizing improving macroeconomic conditions to motivate banks to lend.

“Improved macroeconomic conditions will engender banks to lend to the private sector,” Gbolahan told BusinessDay.

This boils down ultimately to speeding up reforms in key sectors of the economy and FX space.

“As a bank, you will not lend when you know the chances of repayment is slim. These banks have burnt their hands lending to oil players in the past and they have learnt their lessons the hard way,” Asimuyi told BusinessDay.

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