The banking system will in the short term see a whopping N834.0 billion being sterilised by the Central Bank of Nigeria (CBN) following the implementation of the new policy on Cash Reserve Ratio (CRR).
In trying to manage inflation and liquidity overhang in the banking industry, occasioned by the fiscal spending and the re-jigged Open Market Operation (OMO) policy which saw the exclusion of some actors from the market, CBN last week Friday raised CRR by 500 basis points to 27.5 percent.
The banking system liquidity is expected to be boosted by an additional inflow of N495.0bn from OMO maturities and Analysts at Afrinvest Securities Limited expect to see increased activities in the secondary market.
“Depending on how the CBN aims to implement the CRR increase in the short term, we expect the policy to alter the demand witnessed over the previous weeks as an additional c. N834.0bn worth of liquidity is likely to be sterilized from the financial system,” the analysts said.
One of the implications of this new development on the sector is that banks earnings will definitely be threatened with its high volumes and low margins.
Also, on implementation of this new policy that is when the CBN begins to debit banks on the new CRR, banks will be in a situation where they would be scrambling over the place for money.
“I think that the cost of funds could be the real issue because they have to cover this position,” Bismarck Rewane, managing director of Financial Derivatives Company Limited said.
Razia Khan, managing director, Chief Economist, Africa and Middle East Global Research, Standard Chartered Bank, expects market interest rates to adjust to, most likely at the very front-end of the curve.
However, continued OMO maturities will still prove to be an offsetting influence, but the floor in yields should now adjust higher, sending a message on the CBN’s intention to preserve currency stability and its ongoing concern over the price level, said Khan.
Johnson Chukwu, managing director, Cowry Asset Management Limited sees the banks suffering from multiple regulatory headwinds. One is that the CBN on one hand wants them to lend 65 percent of their deposits and also keep 27.5 pecrcent of their deposit to CBN and 30 percent liquidity, but the CRR does not count as liquid assets. So it is almost impossible for the banks to comply will all these regulatory requirements and still make profits.
The amount in cash reserve is completely sterilize, and does not attract interest to the banks, so the banks are going to have 27.5 percent of their deposit with the CBN at no interest, no benefit and they can only lend 65 percent of their money and expected to keep liquidity ratio of 30 percent.
“So if you sum all these, it is clearly above the 100 percent of the deposit. So in effect, the CBN is expecting banks to lend from their shareholders’ fund,” Chukwu said.
Godwin Emefiele, CBN, governor assured that the raised CRR will not in any way impede lending but will rather help strengthen growth which the International Monetary Fund (IMF) projects will come through at 2.5 percent in 2020.
The CBN’s economic report for the quarter revealed that total deposits at the CBN amounted to N14.35 trillion at the end the November 2019, indicating an increase of 3.6 per cent above the level at end of third quarter 2019. The rise was attributed to 14.3 per cent and 3.1 per cent increase in the deposits of the Federal Government and the commercial banks, respectively. Of the total deposits at the CBN, the shares of the Federal Government, banks and private sector deposits were 47.4 per cent, 35.9 per cent and 16.7 per cent, respectively.
Reserve money grew by 5.0 per cent to N7.35 trillion at the end of November 2019, in contrast to the decrease of 13.5 per cent at the end of third quarter of 2019. The development reflected the increase in federal government and banks’ deposits with the CBN.
HOPE MOSES-ASHIKE
