What to expect as CBN ends daily CRR debits on banks

The Central Bank of Nigeria (CBN) on Friday said it will discontinue the daily debit of Cash Reserve Requirements (CRR) from banks deposits and adopt a weekly method.

While the CBN said it will come up with a new CRR framework, the move aims to enhance commercial banks’ planning, monitoring, and aligning records with the directives of the CBN.

This was disclosed in a circular to all banks, dated February 2, 2024 and signed by Adetona S. Adedeji, acting director, banking supervision department.

The implementation of the new Cash Reserve Requirement framework will follow a structured process, as outlined by the banking and financial institutions regulator.

Under the proposed changes, analysts say banks would gain clearer insights into the expected debits, providing transparency and aiding better financial planning. The move is seen as a departure from the previous reliance on numerical targets, offering banks a more tangible understanding of the potential CRR impact.

“The timing of computing as well as debiting of excess CRR (for non-compliance) is the only thing changing. Instead of daily computations that give bankers headache, LDR compliance would now be assessed weekly”, Abiodun Keripe, managing director, Afrinvest Research and Consulting, said.

He said CRR is a monetary policy tool and that many factors have to go into consideration if at all it has to be discontinued.

Consequently, the CBN said the existing ratio of 32.5 percent will be applied to increases in the weekly average adjusted deposits of banks. This incremental approach seeks to provide a measured adjustment to the CRR in relation to the growth in banks’ deposits.

In a bid to encourage lending activities, the CBN will enforce a CRR levy of 50 percent on the lending shortfall for banks that fail to meet the minimum Loan to Deposit Ratio (LDR) requirement.

Analysts questioned the rationale behind the strict adherence to maintaining a 60 percent loan-to-deposit ratio.

They argue that, given the current credit landscape, pushing banks to increase lending might not align with economic realities. The fear is that such policies could contribute to a significant increase in the money supply, potentially contradicting the central bank’s inflation targeting efforts.

Critics suggest abandoning the Loan to Deposit Ratio (LDR) altogether, pointing out that Tier 1 banks already have a substantial portion of their assets in liquid form. For these banks, 40 percent comprises loans while 60 percent remains in liquid assets. The argument is that forcing banks to create more loans under the LDR regime might lead to unnecessary credit expansion and customer deposit movements.

Ayodele Akinwunmi, relationship manager corporate banking at FSDH Merchant Bank, emphasized the lack of transparency surrounding the CRR, which currently deducts 32.5 percent from every deposit. Ayodele expressed concerns about the opaque nature of the CRR policy, noting that the CBN’s move to discontinue daily CRR debits aims to bring about increased transparency and clarity in monetary policy. The CBN’s decision reflects a commitment to openness, allowing banks to better plan and understands their financial positions.

While the full details of the new policy are yet to be disclosed, he said it is anticipated to be welcomed by banks due to its transparent nature. The shift is expected to force banks into a more proactive lending stance, aligning with the administration’s push for increased openness and economic predictability. The cessation of daily CRR debits is seen as a strategic move to regulate money in the system and promote a more transparent and comprehensible monetary policy landscape, he added.

The CBN assures banks that detailed information regarding the applied charges and the computation rationale behind them will be provided to ensure transparency and understanding.

In the circular, the CBN said it aims to streamline the CRR framework to facilitate better compliance, transparency, and efficiency in the banking sector.