• Thursday, March 28, 2024
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BusinessDay

CBN moves to restrict banks’ appetite for FG securities

Godwin Emefiele

The Central Bank of Nigeria (CBN) is set to roll out a comprehensive framework that would discourage the current high appetite by commercial lenders for government securities and encourage increased credit flow to the poorly-served productive sectors of the economy.
CBN governor, Godwin Emefiele, said this on Tuesday as he announced the apex bank’s monetary policy committee (MPC) decision to hold all benchmark lending parameters, including the Monetary Policy Rate (MPR) at 13.5 percent; Cash Reserve Ratio (CRR) at 22.5 percent; Liquidity Ratio at 30 percent, as well as asymmetric corridor of +200/-500 basis point around the MPR.

Responding to questions at a press briefing in Abuja, Emefiele admitted that the MPC was signalling to the banks against the growing appetite for government securities which continues to crowd out the private sector seen as the engine of growth.

“The truth is that according to our own regulation, there is a particular minimum percentage of government securities that the banks must invest in to remain liquid, but again, we have observed unfortunately increasingly that banks rather than focusing on granting credit to the private sector tend to direct their focus mainly in buying government securities,” Emefiele said.

“The Monetary Policy Committee has frowned on that, and has directed the management of the CBN to put in place policies or regulations that will restrict the banks from unlimited access to government securities,” he said.

The decision taken after the two-day meeting of the MPC in Abuja comes at a time when the apex bank appears to be in a dilemma of an inflation uptick amid fragile economic growth.
According to figures from the National Bureau of Statistics (NBS), inflation rose for the first time in 2019 to 11.37 percent in April, from 11.25 percent in March.

“It is important and expedient that we do this because this country badly needs growth and for us to achieve growth, those whose primary responsibility it is to provide credit, who act at intermediaries in providing credit and are called catalysts to economic growth, must be seen to perform that responsibility,” Emefiele said.

Data on the domestic economy, according to Emefiele, suggest some fragility in output growth during the second quarter of 2019 with improved output expected for the rest of the year.
“The decision by the committee, to me, is like a historical backwardness. The economy is growing at a very slow pace at 2.01 percent. For four years, we have seen growth in the GDP well below the population growth,” said Bismarck Rewane, managing director/CEO, Financial Derivatives Company Limited.

Razia Khan, Africa chief economist at Standard Chartered Bank, London, told BusinessDay that ‘further discussions’ by the CBN with the banks might increase their appetite for consumer credit extension.

Emefiele also worried that output growth remains well below the economy’s potential indicating the existence of spare capacity for non-inflationary growth, an opportunity he said should be explored.

Reacting to the move, Rewane said, “Setting up a policy that will limit banks from investing in financial securities will mean that Nigeria has moved from a situation of moral suasion to moral bullying.”

Recent NBS data showed that banking sector credit to the economy declined 2.9 percent from N15.6 trillion in Q3 2018 to N15.1 trillion in Q4 2018. Similarly, the number of customers borrowing from commercial banks also headed south.

In 2017, which is the latest data released by the statistical agency, the number of customers borrowing from banks stood at 2.3 million, a 23 percent decline from the 3 million figure in 2014.

“We do not expect any restrictions imposed by the CBN to have a disproportionate impact on market yields, driving them higher. Instead, we expect to see a gradual recovery in private sector credit, but only after legacy issues in the banking sector have been addressed,” Khan said.

Emefiele admitted that banks have always resisted creating credit to the private sector for fear of past experience with bad loans, and therefore the MPC directed the management to think out what it called “an administrative, legal, regulatory framework” to ensure that some of the credit risks that are associated with granting loans to the private sector which ultimately results in non-performing loans (NPLs) should be mitigated.

Banks NPLs averaged 9-10 percent, higher than the 5 percent threshold but lower than the 15 percent recorded a year or two ago.

Khan said the CBN’s next steps, which promise to speed up the recovery of delinquent loans, will be closely watched.

“Also of interest – given greater use of the investor and exporters I&E FX rate for reporting purposes, will be what happens to some banks’ need for additional capital. While this issue was not addressed in the CBN press conference, it remains a likely precursor to any meaningful improvement in credit growth. Cue the next wave of capital raising from Nigerian financial institutions,” Khan added.

HOPE MOSES-ASHIKE & MICHAEL ANI, Lagos, ONYINYE NWACHUKWU, Abuja