Despite the enormous pressure COVID-19 pandemic has fostered on businesses, the commercial banks in Nigeria are yet faced with another concerns as the Central Bank of Nigeria penalised them by debiting a total of N2.14trn between April and June this year for not meeting the 27.5 percent Cash Reserve Ratio (CRR).
CRR is a certain minimum amount of deposit that the commercial banks have to hold as reserves with the central bank. This is aimed at ensuring that banks do not run out of cash to meet the payment demands of their depositors.
This was raised in January this year by five basis points from 22.5 per cent to 27.5 per cent, despite inflation standing at 12.4 percent since August last year.
In its wisdom, the Monetary Policy Committee (MPC) had stated that the rising price level to a combination of structural and supply side factors, expansionary fiscal policy and growth in money supply arising from rising liquidity surfeit in the industry due to changes in the Bank’s Open Market Operations (OMO) policy necessitated the raise.
In furtherance of its primary mandate to maintain price and monetary stability and in view of the anticipated medium-term liquidity surfeit from maturing OMO bills held by local private and institutional investors, which would not be rolled over, the Committee considered it prudent to raise the CRR to curtail liquidity surfeit in the banking system.
The Committee is confident that increasing the CRR at this time is fortuitous as it will help address monetary-induced inflation whilst retaining the benefits from the bank’s LDR policy, which has been successful in significantly increasing credit to the private sector as well as pushing market interest rates downwards,” it had stated in the January MPC Meeting communique.
Other measures the apex bank put in place to boost the economy and make credit available to the real sector even before the COVID-19 pandemic began is for DMBs to maintain a Loan to Deposit (LDR) of 65 per cent. And the CBN introduced sanctions for erring banks who failed to meet the 65 per cent with an increase in their CRR to the tune of the difference in the new LDR as a way to force banks to keep more funds idle with CBN instead of trading in foreign exchange, treasury bills and other OMO instrument rather than lending to customers.
In April this year, had debited 29 Deposit Money Banks (DMOs) a total of N1.469 trillion for failing to meet the 27.5 per cent CRR targets. Three tier 1 banks suffered the largest debit of over N760 billion with Zenith Bank debited the highest with N355.95 billion, FBNH with N208.1 billion and UBA with N204.76 billion.
Others are Stanbic IBTC with N143.98 billion, Standard Chartered with N120.65 billion. GTBank was debited with N65.6 billion, Union Bank with N49.86 billion, Ecobank with N43.05 billion, Access Bank with N41.34 billion, Citi Bank with N38.33 billion, Fidelity Bank with N32.15 billion and First City Monument Bank (FCMB) with N27.26 billion.
In the first week of this month, it had debited 26 banks including merchant banks, to the tune of N459.7 billion for failure to meet their CRR obligations. Among the banks that were most affected are United Bank for Africa Plc which was debited N82.3 billion, First Bank of Nigeria with N59.3 billion, Zenith Bank Plc with N50 billion, FCMB with N45 billion, and Guaranty Trust Bank with N40 billion.
Two weeks later, it debited 26 banks including merchant banks the sum of N216.1 billion as part of its CRR compliance requirement. The most affected banks include Zenith Bank which was debited N46.3 billion, Stanbic IBTC debited N30 billion, GTB which was debited N25 billion. Others include FCMB with N15.5 billion, FBN with N15 billion, Citi Bank with N11 billion and Standard Chartered Bank with N10 billion amongst others.
Bankers and analysts commenting on the deductions noted that it had become a regular occurrence as a way the CBN cuts down banking sector liquidity.
A banker noted:
What we’ve seen in recent times is that the CBN debits banks, usually towards the stale-end of every week. They will look at your bank account and if your liquidity is plenty, they will debit you.
The Central Bank also does what we call retail foreign exchange intervention, that is when they sell forex to corporates. Now, because they don’t want banks coming with huge demands, what they do is that a day before the forex sales, they debit the banks so that the naira you have available is small and you cannot put them under pressure because of your forex demands.
We understand that the central bank had set up a special CRR team that is supposed to monitor banks’ CRR once a month. But now, the team monitors banks’ CRR on a weekly basis. This is why the central bank is effectively debiting banks on a weekly basis. Some weeks ago, they debited some banks about N1.4 trillion. That was one of many. Between that time and now, there have been more debits that have happened. But the debits that are huge/significant are what is troubling the banks.
The implication of the deductions on banks and their earnings would be a downward pressure on banks liquidity ratios.
Banks under our coverage already have effective CRRs north of 35 per cent. As such, the exact criteria for the debits are unclear. The latest round of debits underscores the negative shift in the regulatory landscape for the banks.
One of the major implications of the CRR debits for deposit money banks is the adverse material impact on their liquidity ratios. Excluding Stanbic and GTB whose liquidity ratios increased materially for the former and flat for the latter, all the banks have seen their liquidity ratios fall. On average, they have declined by almost -500bps since the CBN commenced its CRR debits in H2 2019 . Excluding Stanbic, the average decline for our coverage worsens to over -1,000bps. In absolute terms, Zenith and UBA have been the worst hit with liquidity ratio reductions in excess of -3000bps and -1,600bps respectively.
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