Liquidity squeeze: Banks, others borrow N4.4trn from CBN
By Kayode Tokede
The Deposit Money Banks (DMBs) and merchant banks operating in the country between January and April 2021 have borrowed N4.4trillion from the Central Bank of Nigeria (CBN), our correspondent report.
This is 91 per cent DMBs and merchant banks borrowed from the CBN when compared to N2.33trillion borrowed between January and April of 2020. The breakdown by Nigerian NewsDirect revealed that DBMs and merchant banks borrowed N426.7billion from CBN in January and it increased to N621.67billion in February.
According to the CBN financial data, DBMs and merchant banks borrowed N904.68billion from CBN in March while in April the figure hits N2.48trillion.
Our correspondent also gathered that DBMs and merchant banks deposit with CBN dropped by 27 per cent to N1.53trillion between January and April from N2.11trillion reported between January and April of 2020.
The Standing Lending Facility (SLF) allows banks, others to quickly cover short-term liquidity requirements while Standing Deposit Facility (SDF) is also a monetary policy operation used by CBN to absorb deposits from DBMs, others, without involving the use of government securities as collateral in return.
The trend in the first four months showed that banks borrowed more than they lend at the window, due to the liquidity condition in the banking system, with applicable rates for the SLF and SDF at 12.5 per cent and 4.5 per cent, respectively.
The CBN in 2019 had said it would no longer remunerate daily bank deposit in excess of N2 billion placed at its SDF on the drive to support ot Loan-to-Deposit Ratio (LDR) policy of 65 per cent.
Analysts have expressed that liquidity crunch in the country responsible for increasing DBMs and merchant banks borrowing from the apex bank in the first four months of 2021.
The Managing Director, Highcap Securities Limited, Mr. David Adnori expressed that growing demands from DMBs and merchant banks responsible for hike in borrowing from CBN.
He was quick to add that liquidity crunch is another major factor DBMs and merchant banks borrowed funds from CBN to meet their daily business activities demands from customers.
According to him, “There are two reasons why banks may borrow heavily from the CBN. The first has to do with booming economy as opportunities are increasing in the banks. There are always demands on banks fir credits as borrowers go to banks to access funds.
“The banks’ balance might not be enough to meet customers’ borrowers, forcing them to borrow from CBN to lend to customers demanding for credit.
“The CBN itself may not have such money and it might issue new money and borrow it to the banks which the bank will lend to customers. That is the method in which money is printed by CBN in a normal economy.
“These are routes through which new money enters the economy.”
He explained further that “The second reason why banks visit CBN to access money is when there is liquidity crunch in the system.
“Depositors as you likely know always give money to banks. The bank will try and access funds through the inter-bank market and if they cannot, they try CBN as the lender of last resort to borrow money as a move to boost their liquidity position.”
He explained that hike in 2021 borrowing by DMBs and merchant banks is due to stability in nation’s economy.
In his words, “Why the 2021 doubled when compared to last year was that economy was depressed last year because of COVID-19 lockdown. Remember also, that the interest from banks was low.
“This year, that economy is getting back, interest rates have increased and banks are lending to borrowers. They can now visit CBN and borrow money at a cheaper rate and make profit on the borrowing.”
Research Analyst, Mr. Abayomi Peters said the 91 per cent increase in SLF is due to liquidity challenges in the sector.
According to him, “The increase may have been the impact of the prevailing liquidity conditions in the banking sector.”
He explained further that “As we know, the CBN retained its tight stance on monetary policy, in its bid to maintain price stability and put a lid on inflation.
“Most of the lending from the CBN would have gone to tier-II banks and merchant banks as they felt the brunt more during the period.”
However the apex bank in its January 2021 Economic Report explained that DMBs and merchant banks made more placements than borrowings in the Standing Facilities window in January 2021.
According to the report, “Total request for the SLF and granted from January 1–31, 2021 was N492.50 billion, made up of N68.30 billion direct SLF and N424.20 Intraday Lending Facilities (ILF) converted to overnight repo.
“Daily average was N35.18 billion in 14 transaction days from January 1–31, 2021 with a total interest of N0.29 billion.
“Total SDF granted, during the review period, was N528.33 billion with a daily average of N26.42 billion in 20 transaction days from January 1-31, 2021. Daily request ranged from N4.70 billion to N42.59 billion.”
