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Why you should be worried by CBN’s frequent debit of banks over CRR/LDR breach

The incessant debits by the Central Bank of Nigeria (CBN) on banks is the last thing Africa’s largest economy needs at a time when it is faced with a pandemic-induced recession.

The latest round of bank debits by the CBN was a sum of N219 billion which the banks had to give up for breaching the regulator’s Cash Reserve Requirement (CRR) guidelines.

That takes bank debits made by the CBN whether for breaching CRR or LDR ratios to a total of N2.1 trillion in 2020. The CBN took N459.7 billion from the banks some three weeks ago and N1.4 trillion in April.

The immediate implication of the constant debits is that it mops up liquidity in the banking system, drives up funding costs for banks and limits their ability to lend in an economy starved of credit.

Read also: CBN’s bid to unify FX rates around I&E window seen as big boost to attracting investment

Although there remains significant liquidity in the system, that could soon change if the arbitrary debits continue.

For businesses, particularly SMEs which form the bulk of employers in Nigeria, it means bank lending will be more expensive as banks pick and choose borrowers carefully now that they have limited cash to lend.

It could also lead to higher interest on banks’ payday loans or trigger a slowdown altogether. These loans are critical for many individuals who are fast falling back on them as the coronavirus pandemic threatens livelihoods.

This contradicts the CBN’s efforts to boost bank lending to the real sector. It was in a bid to improve lending that the apex bank introduced the LDR policy in 2019 which mandates banks to lend 65 percent of deposits. The CBN also cut its policy rate to 12.5 percent in May to achieve the same purpose. Bankers have however argued that a high CRR undermines the CBN’s lending objective.

Nigerian banks have one of the highest CRR of peer African economies at 30 percent (even though the effective rate is much higher). South Africa, Ghana, Kenya and Tanzania all have CRR below 10 percent. A high CRR leaves banks less liquid which could in turn stifle credit growth.

What’s worse is that bankers can no longer explain the basis for the debits over CRR, given that they already meet the CBN’s guidelines. That has made some of them conclude that the debits may be a back-door way of suppressing dollar demand.

Tunde Abidoye, an equity research analyst at FBN Quest, says the latest round of debits underscores the (negative) shift in the regulatory landscape for the banks.

“Banks under our coverage already have effective CRRs north of 35 percent; as such, the exact criteria for the debits are unclear,” Abidoye said.

“Given the size and timing of the debits (before fx auctions), it is hard to argue that the debits are not being employed as an administrative tool for fx management,” Abidoye said in a note to clients, Wednesday.

One of the major implications of the CRR debits for deposit money banks is the adverse material impact on their liquidity ratios, according to Abidoye.

Excluding Stanbic and GTB whose liquidity ratios increased materially for the former and flat for the latter, many banks have seen their liquidity ratios fall.

In absolute terms, Zenith and UBA have been the worst hit with liquidity ratio reductions in excess of -3000bps and -1,600bps respectively.

Tier 2 banks like FCMB and Fidelity have seen their ratios fall to close to the regulatory minimum of 30 percent.

Consequently, banks with lower levels of liquidity are likely to see an uptick in their funding costs (and downward pressure on their NIMs) as they seek to replenish their deposits to enhance their liquidity buffers.

All else equal, a 50-100bp increase in the cost-of-funds may result in a -25 percent to -60 percent reduction to the PBT of both tier 2 banks.

For tier 1 banks like GT Bank and Zenith, the impact to earnings is less significant at between 6 percent and 20 percent respectively under the same set of assumptions.

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