The Central Bank of Nigeria (CBN) is making discretionary debits on the banks under a controversial Cash Reserve Ratio (CRR) rule as a back door way of tightening liquidity in the system after OMO auctions became unsustainable.
By debiting banks over CRR breaches, the CBN is able to mop liquidity in the system at zero expense unlike issuing OMOs which come at a cost to the CBN in interest payments.
Last year alone, the CBN spent N1 trillion in interest payments on OMO bills. That’s more than the federal government spent on health and education combined that year.
Worried by the rising cost of OMO issuance, the CBN turned to discretionary CRR debits, not minding the opportunity cost of the huge amount held in CRR (N10.4 trillion) for banks.
The discretionary debits are also seen by the CBN as a viable administrative tool for foreign exchange management. Sources familiar with the matter say the debits are usually made days before an FX auction. By draining the banks of naira liquidity, the CBN is able to reduce how much they are able to bid for FX thereby reducing pressure on the CBN for FX. Hammered by the fall in oil export receipts, Nigeria’s major earner of dollars, the CBN has struggled to meet the dollar demand of investors and importers, leading to a backlog that is frustrating investors and manufacturers.
Read also: Again, CBN hammers banks with CRR debit of N118bn
With dollar inflows declining and its external reserves under increasing pressure, the CBN has resorted to demand management strategies last seen in 2016 during an acute dollar scarcity.
Latest CRR debit of N118bn
The CBN again debited banks to the tune of N118 billion last Friday over a breach in a curious Cash Reserve Ratio (CRR) rule.
Last week’s debit is the fourth by the CBN this year and brings the total sector debits for 2020 to about N2.2 trillion.
The move brings “further downward pressure on banks liquidity ratios and earnings,” according to Tunde Abidoye, an analyst at Lagos-based FBN Quest.
Unlike previous debits for which Zenith and United Bank for Africa (UBA) were the most affected banks, Stanbic IBTC and GT Bank were the hardest hit this time around, both with debits of N15 billion each.
“Based on the total sum that each bank has been debited this year, and our NIM assumptions for each bank, we estimate an aggregate opportunity cost of funds of N86bn for our universe of banks coverage,” Abidoye said in a note to clients.
Due to the sizable debits on their accounts with the CBN, Zenith and UBA have the highest opportunity cost of funds at N34.4bn and N15.8bn respectively.
In contrast, Fidelity and Access are the least impacted, with opportunity cost of funds of N2.9bn and N3.8bn respectively.
Choking CRR
By twisting its official CRR rule, which mandates banks keep 27.5 percent of their deposits with the apex bank at zero interest, the CBN now holds as much as 60 percent of deposits, more than double the official rate. That means for every N100 the banks hold in deposits, N60 is with the CBN earning zero interest.
The 60 percent effective CRR rate, the highest globally, is even higher for some banks, putting a strain on profitability and draining the banks of much needed liquidity.
