The Central Bank of Nigeria (CBN) has deducted a whopping N1.4 trillion from the banking sector’s Cash Reserve Requirement (CRR) as all Nigerian Deposit Money Banks (DMBs) and merchant banks failed to meet the 65 percent Loan-to-Deposit Ratio (LDR) at the end of March 2020.
This is coming at a time when the COVID-19 pandemic has hit hard on the economy and financial sector.
CRR is the amount in percentage of total deposits that the banks must keep with the CBN.
The deduction, though in line with the CBN’s liquidity management measures as the excess liquidity in the banking sector stood at above N1 trillion on Thursday, analysts are surprised at the scale of the CRR debit.
What this means is that banks may go hard on their debtors despite CBN imploring them to consider loan restructuring for their customers.
It means that banks are under pressure as interest income, a major earnings source, will be affected as they have fewer funds for investment and lending.
“Our monetary policy system is in a mess,” said Damilola Adewale, a Lagos-based economic researcher.
The debit at this critical time points to yet another policy error by CBN, Adewale said.
He said he thought the CBN would have reviewed the CRR downwards to enable banks have more liquidity to support businesses.
“It seems banks’ major headache now is excessive regulations, ahead weak oil prices and weak tough operating environment,” he said.
The list of banks debited, as seen by BusinessDay, showed that tier-one lenders were mostly affected. Zenith Bank plc was debited N355.9 billion, First Bank of Nigeria N206.1 billion, United Bank for Africa (UBA) N204.7 billion, GTBank N65.6 billion, and Access Bank N41.3 billion.
Other banks include Stanbic IBTC N143.9 billion, Standard Chartered N120.6 billion, Union Bank N49.8 billion, Ecobank N43.05 billion, Citibank N38.3 billion, Fidelity Bank N32.1 billion, among others.
The CBN on January 8, 2020 extended the deadline for meeting the 65 percent Loan-to-Deposit Ratio (LDR) to March 31, 2020.
Omotola Abimbola, a macro and fixed income analyst at Lagos-based Chapel Hill Denham, said the debit was not completely unexpected, although the scale of the debit was very large.
As at Thursday, excess cash liquidity that banks were holding was above N 1 trillion, which was extremely higher than the normal level of excess liquidity in the banking sector.
The excess liquidity, Abimbola said, is attributed to a number of factors, one of which is that Foreign Portfolio Investors (FPIs) who liquidated their naira investments cannot get out because there is no liquidity in the Investors’ and Exporters’ (I&E) forex window.
“So, I guess that is why the CBN decided to take a decision to take away that liquidity in form of CRR debit to reduce the level of demand for FX,” he said.
He, however, suggested that CBN should try to be consistent in its policy and also try to communicate to the market its plans to actually solve the liquidity challenges in the I&E window currently.
“It depends on what happens as well because one thing we can not rule out is that once the CBN returns to the I&E window to start selling dollars and liquidity inflows improve, the FPIs will have their money and will evidently have to take away their funds again,” Abimbola said.
“So, there is a chance that the CBN may try to return the money debited from the banks because when people try to exit the market, they would need to exchange their naira for the dollar. But for the banking sector, it will be a very challenging year for them,” he said.
Uche Uwaleke, professor of Finance and Capital Market, Nasarawa State University, Keffi, and chairman, Chartered Institute of Bankers of Nigeria, Abuja branch, said the effectiveness of monetary policy is largely a function of the extent to which DMBs comply with CBN’s guidelines and reserve requirements. Until these requirements are amended based on evidence considered by the CBN to be in the overall interest of the economy, any bank that flouts the requirements should be made to face the appropriate sanctions as a deterrent to others.
“It bears repeating that the regulation of the financial system, over which the CBN superintends, in this period of crisis cannot afford to lax,” Uwaleke said.
The CBN at the first meeting of the Monetary Policy Committee (MPC) in January increased the CRR to 27.5 percent from 22.5 percent.
MPC members had in February raised concern on the excess liquidity in the banking sector, occasioned by open market operations (OMO) ban for non-bank investors and corporates, saying it was a threat to foreign exchange stability and the country’s external sector.
Gbolahan Ologunro, a research analyst at Lagos-based CSL Stockbrokers, said the CBN is trying to ensure banks do not start to speculate in the FX market.
“The profitability of banks might have suffered another blow, despite regulatory-induced cuts in e-banking fees amidst a blurry macro outlook which is expected to drive impairment charges in the short to medium term. The funds sterilised by the apex bank effectively limit the quantum of funds banks can invest in risk-free instruments or creating risky assets,” Ologunro said.
“Accordingly, banks will have to forgo the interest income that should have been earned on such funds and at the same time still bear the cost of the funds. It is a double whammy for Net Interest Margin (NIMs),” he said.
HOPE MOSES-ASHIKE & BUNMI BAILEY
