Nigeria’s Central Bank on Friday debited banks of Cash Reserve Ratio (CRR) worth N462.7 billion for breach of its lending policy, a top banker disclosed to BusinessDay.
The CRR, which is the amount in percentage of total deposits that the banks must keep with the Central Bank, has always been above the official rate but has jumped further following the apex bank’s CRR hike to 27.5 percent from 22.5 percent at its first Monetary Policy Committee (MPC) meeting of 2020.
Ayodeji Ebo, economist and investment professional, said the deduction will continue to increase the effective CRR beyond the statutory threshold and limits the ability of the banks to consider other likely potential income positions.
What the deduction means for the sector is that it puts pressure on the Net Interest Margin of the banks as these funds earn zero interest with the CBN, Ebo said.
This is responsible for the low deposit rates in the banks as banks may be wary of taking deposits.
On the positive side, Ebo said the low interest rate has shifted investors’ focus to other asset classes with higher yield which aligns with the CBN’s position.
The Overnight (O/N) rate on Friday increased by 3.58 percent to close at 4.88 percent from 1.30 percent on the previous day, and the Open Buy Back (OBB) rate also increased by 3.35 percent to close at 4.00 percent as against the last close of 0.65 percent.
The money market rates spiked by an average of 347 bps following FX retail auction by the CBN, analysts at FSDH Research said.
The CBN at the first MPC meeting in January increased the CRR to 27.5 percent from 22.5 percent. The increase then was as a result of concerns on the excess liquidity in the banking sector, occasioned by open market operations (OMO) ban for non-bank investors and corporates.
In March this year, the CBN deducted a whopping N1.4 trillion from the banking sector’s CRR as all Deposit Money Banks (DMBs) and merchant banks failed to meet the 65 percent Loan to Deposit Ratio (LDR) at the end of March 2020.
In June 2020, the CBN debited banks the sum of N216bn for breaching its CRR requirements.
One of the major implications of the CRR debits for deposit money banks is the adverse material impact on their liquidity ratios, FBNQuest said in a note in June.
In July 2020, the CBN debited banks an additional sum of N118bn for breaching its CRR requirements.
The higher CRR is in line with the CBN’s liquidity mopping efforts which have intensified this year amid rising inflation.
The problem with a higher CRR is that it contradicts the CBN’s stance to boost lending in an economy still reeling from a recession and which may slide into a second recession in four years as, according to President Muhammadu Buhari, the third-quarter GDP numbers are projected to be negative.
At the foreign exchange market, naira remained stable on Friday as the dollar was sold at N457 on the black market and the Bureau De Change (BDC) segment.
At the Investors and Exporters (I&E) forex window, naira also remained stable at N385.83 per dollar. Analysts at FSDH Research said most participants maintained bids between N380.00 and N392.89 per dollar.
In September 2020, the CBN’s FX sales to the SMEs, Invisibles and SMIS (retail and wholesale) segments totalled $400 million as compared to $457 million in August, while at the I&E FX market, the CBN intervened to the tune of $435 million, with estimated sales to BDCs of $295 million, a report by FSDH stated.
