Lending at risk with CRR near 40% for some banks

Some Nigerian deposit money banks have their effective cash reserve ratio (CRR) as high as 40 per cent, much higher than the 22.5 per cent regulatory ratio, with negative implication for credit creation in the economy, BusinessDay findings show. The CRR is calculated as a proportion of customer deposits and determines how many commercial banks must set aside with the Central Bank of Nigeria (CBN), rather than lend out. One top bank Chief Executive told BusinessDay that the CBN sometimes automatically debits lenders for Treasury bill purchases, which adds to the 22.5 per cent CRR.

This is threatening banks capacity to lend to the real sector of the economy and putting in doubt any quick achievement of low-interest rates, analysts said. Ayodeji Ebo, Managing Director, Afrinvest Securities Limited said it will affect the banks’ ability to create risk assets. Besides, he said the effective cost of funds will be very high due to the interest expenses paid on the total deposit received relative to the available (approximately 60.0% of the deposit) portion for investment or lending.
“This is one major reason lending rates would remain high as banks strive to sustain their margins as well as returns on assets and equity,” Ebo said.

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

“The CBN needs to urgently look into this to incentivize the banks to lend at an affordable rate amidst alternative high yielding fixed-income investments,” Ebo said in an emailed response to BusinessDay.
Godwin Emefiele, CBN governor had last month signalled a loosening of the tight money policy and a possibility of an interest rate cut next year with the monetary policy rate (MPR) currently at an elevated 14 per cent. Analysts believe this can be achieved in the first quarter of 2018. Credit to the private sector, however, contracted by 0.24 per cent in October 2017 compared with the provisional benchmark of 14.88 per cent growth according to central bank data. Special auctions that are being used by the central bank to make “massive injections of cash” to the government, effectively raised banks’ cash-reserve requirements beyond the stipulated 22.5 per cent, said Monetary Policy Committee (MPC) member Doyin Salami, earlier this year.

“We thus find ourselves at a point where government borrowing from the central bank is neutralized by raising the cash reserve ratio of banks, thereby limiting private-sector access to credit,” Salami said according to a CBN statement from the MPCs July 24-25 meeting. The CBN sold N103.07 billion naira of one-year debt at a rate of 15.57 per cent, at an auction last Wednesday (Nov. 29) according to the regulator. This was N23.04 billion naira more than it had initially offered to sell in that maturity as investors bid as high as 18 per cent for the one-year paper. Many central banks, especially in developing and emerging markets, use a required reserve ratio (RRR) or cash reserve ratio (CRR) as a tool of monetary policy. By changing the ratio, central banks can influence the growth of credit.

Peer countries in Africa have much lower reserve requirements compared to Nigeria.
The regulatory CRR in Ghana stood at 10 per cent, Kenya (5.25 %), and South Africa (2.5%) as at November 2017, data compiled by BusinessDay show. Sources say the CBN is trying to maintain FX stability by squeezing naira liquidity. “You need naira to bid for dollars,” said one banking source.
“It is why interbank rates or NIBOR this year have seen more spikes than at any time before. The downside though is that this strategy has costs.”  Total loans and advances extended by Nigerian banks declined by 1.3 per cent to N15.9 trillion in September 2017 from N16.1 trillion in December 2016, according to data from the Nigeria Deposit Insurance Corporation (NDIC).

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

Nigeria’s economy expanded 1.4 per cent in the three months through September, the second straight quarter of sub-par growth (the economy expanded an average of 6% per annum between 1999 and 2014) after five consecutive quarters of contractions that saw gross domestic product (GDP) shrink 1.6 per cent in 2016, the first drop since 1991. The structural constraints in the transmission of credit to the real sector of the economy as well as the rising unemployment level were noted at the last MPC meeting in November. “I think many banks are looking for relative safety with modest returns which the government offers including returns on cash reserve ratio. This is however not good for the economy facing liquidity challenges while many businesses are unable to access credit. Also, the government claims to be pursuing reflationary measures to boost economic growth but this is inconsistent with a high CRR regime,” Taiwo Oyedele, head of tax and regulatory services, PWC, said.

Money supply (M2) contracted by 5.54 per cent in October 2017 (annualised), in contrast to the provisional growth benchmark of 10.29 per cent for 2017. The development in M2 is largely due to the contraction of 37.50 per cent in other assets net (OAN). Similarly, M1 contracted by 7.79 per cent (annualised to-9.35 per cent). However, Net domestic credit (NDC) expanded by 1.18 per cent, annualized to 1.42 per cent, driven primarily by net credit to government, which also expanded by 7.60 per cent against the programmed growth of 33.12 per cent, CBN data shows.

MPC members present at the last meeting urged the CBN to continue to encourage deposit money banks to accelerate the rate of credit growth to the real sector of the economy.
The Inflation rate slowed to 15.91 per cent from 15.98 per cent recorded in September. This, however, remains higher than the CBN preferred band of between 6-9 per cent.
CBN data shows that the CRR in Nigeria was as low as 3 per cent in the 1990s.
“Some banks have had their CRR reach 40% lately. If you lose deposits your CRR is effectively higher. It has been happening for some time, one-way CRR,” a second banking source told BusinessDay.