Commercial banks deposit with CBN shrink amidst lending to Real Sector

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…deposit with CBN drops by 66.81% in 8 months

By Kayode Tokede

Commercial Banks deposit with Central Bank of Nigeria (CBN) declined significantly this year as the apex bank enforced lending to real sector in its effort to force banks to lend in an economy still reeling from a contraction in 2016 that caused bad loans to surge.

According to Nigerian NewsDirect findings, the Standing Lending Facility (SDF) between July 11 when the CBN introduced a new guideline titled, “guidelines on access the CBN SDF” has recorded decline as while the Standing Lending Facility (SLF) has recorded more patronage.

Our correspondent gathered that between July 11, 2019 to August 31, 2019, banks total deposit with CBN dropped to N720.36billion compared to N3.26 trillion banks deposit with CBN between July 11 and August 31, 2018.

Further findings revealed that between January and August of 2019, a total sum of N9.33 trillion was deposited with the CBN as against N28.11 trillion deposit between January and August of 2018.

A source explained to Nigerian NewsDirect that most Tier-II commercial banks had increased deposit with CBN following the decline in Monetary Policy Rate (MPR) and means to boost liquidity to drive daily business activities.

But the CBN’s policy of July 11 had forced some to reduce deposit with CBN to concentrate on growing Loan-to-Deposit Rate pegged at 60 per cent. The Monetary Policy Committee (MPC) in March 26, 2019 voted to reduce MPR to 13.5 per cent from 14.00 per cent.

This reflects on applicable rates for the SLF and SDF to drop to 15.50 per cent and 8.50 per cent from 16 per cent and nine per cent respectively.

Analyst explained to Nigerian NewDirect that a daily deposit with CBN above N2 billion does not attract interest and the previous amount was N7.5 billion.

Meanwhile, the circular by CBN to all banks noted that “the remunerable daily placements by banks at the SDF shall not exceed N2billion.”

According to circular signed by Director, Financial Markets Department, Angela Sere- Ejembi, stated that the SDF deposit of N2 billion shall be remunerated at the interest rate prescribed by the Monetary Policy Committee from time to time. She added that, “Any deposit by a bank in excess of N2billion shall not be remunerated. The provisions of this circular take effect from July 11, 2019.”

Analyst who spoke with Nigerian NewsDirect said the guideline on SDF was CBN’s aims to improve market liquidity and, subsequently, encourage deposit money banks to increase lending to the productive sector of the economy.

The Managing Director, Enterprise Securities Limited, Mr. Rotimi Fakayejo said, “This comes with additional incentive of a weight of 150 per cent to the preferred sectors in the computation of LDR.

He said the impact of the new guideline on SDF would force the banks to carry out their core responsibility of intermediation (the circular capped the preference of banks to keep idle balances at the CBN in the SDF window).

Reacting from a different perspective, CardinalStone Research explained that “the recent revision of SDF guidelines is unlikely to drive material credit creation in isolation.

“We, therefore, believe that the apex bank is likely to introduce additional policies to complement the recently issued regulatory measures.”

They explained further that the new measure is also not likely to drive real sector lending, given that banks are still able to redirect excess cash to money market instruments at the secondary market.

“In our view, this factor may have contributed to the bullish sentiment in the T-Bill market in today’s session (average T-bill yields: -100bps to 11.0per cent). Similarly, we believe that the new cap on SDF placements could also force banks to direct some excess funds to interbank placements subject to the level of system liquidity,” analysts at CardinalStone Research added.

However, a group of analysts at ARM research said the CBN has limited top four Tier 1 commercial banks access to its SDF with the policy.

According to the Lagos based research, “Notably, during periods of excess liquidity in the banking system and the accompanied depression in interbank rates, the SDF window afforded banks (especially top 4 Tier 1 banks who are perpetual net placers of funds) an avenue for placing excess liquidity in the absence of OMO or Treasury bills auctions and earn an annualized rate of 8.5per cent.

“Notwithstanding, we believe the impact on income for the Top four Tier 1 banks (Guaranty Trust Bank, Zenith Bank, United Bank for Africa (UBA) and FBN holding, will minimal as we expect such funds to be redirected to the Tier 2 banks which had been perpetual net takers at the Standing Lending Facility, albeit at a much lower rate depending on overall market liquidity.

“Although, we do not perceive CBN will be comfortable leaving excess liquidity with the banks, as such could result in speculation at the foreign exchange market, but it is hard to reason borrowing of same funds via OMO and T-Bills at higher rates from same banks.”

They maintained that the CBN has delivered another news to commercial banks, which now comes in the form of a voluntary rejection of excess liquidity deposited by the banks to CBN via the SDF.

The report by ARM research noted, “The facility had served as a liquidity mop-up mechanism for the apex bank without necessarily issuing government securities in return to the banks. Prior to November 2014, banks could deposit as much liquidity at their disposal with CBN and be remunerated for same. CBN capped the minimum remunerated deposit through the window at N7.5 billion in November 2014, however banks could keep excess at their discretion without being remunerated.

“With the new framework, the allowable daily deposit through the SDF that will now be remunerated is now capped at N2 billion at the applicable MPR minus 500basis points (8.5per cent). We believe the new structure further suggests the apex banks drive to persuade banks to lend to the real sector.”

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