The Central Bank of Nigeria (CBN), last Friday, debited deposit money banks (DMBs) over N600 billion for falling short of the required Cash Reserve Ratio (CRR), findings by New Telegraph show.
The latest debit come three weeks after the apex bank debited the accounts of 23 DMBs with N349.72 billion for failing to meet CRR targets. Commenting on the CBN’s action in a report obtained by New Telegraph, analysts at Zedcrest Capital stated: “It was significant chaos in the interbank space despite the market opening at over N1 trillion positive. Shortly into the day, the apex bank hit the market with a CRR debit of over N400 billion and then another N200 billion totalling over N600 billion overall debit.”
According to the analysts, the CRR debit, coupled with bi-weekly retail intervention funding provision made by most banks, resulted in Open Buy Back (OBB) and Overnight (OVN) rates jumping significantly above 800% to close the day at 8.00 per cent and 9.30 per cent, respectively. The CRR is the minimum amount banks are expected to retain with CBN from customer deposits.
It is an important monetary policy tool that the regulator uses to soak up liquidity from the banking system, thereby curbing inflation and ensuring exchange rate stability.
In January last year, CBN’s Monetary Policy Committee (MPC) increased the CRR by 500 basis points from 22.5 per cent to 27.5 per cent, a decision, it said, was aimed at tackling inflation, as well as helping to achieve the objectives of the apex bank’s Loan to Deposit Ratio (LDR) policy.
CBN had, in July 2019, directed lenders to maintain a minimum LDR of 60 per cent effective from September 30, 2019. It raised the minimum LDR to 65 per cent, which DMBs were expected to comply with by December 31, 2019.
The apex bank said the move was part of measures to encourage lenders to drive credit growth, especially to the real sector of the economy.
Commenting on the policy last year, CBN Governor, Mr. Godwin Emefiele, said: “We give them incentives that when they lend to the small and medium enterprises (SMEs) and private sector, they will be granted certain dispensations to make them happy while failure to comply will result into taking 50 per cent of the un-lent portion of their loans into the CRR.”
Analysts estimate that between January and October last year, CBN sequestered about N6.16 trillion from DMBs with excess cash holdings. In a report released in October last year, Nova Merchant Bank stated that the CBN’s frequent debiting of the accounts of lenders that fall short of both the LDR policy and CRR obligations, had led to an increase in the cost of funds across the banking system. It, however, noted that the LDR policy had significantly helped to boost lending to the real sector and also brought down the cost of borrowing.
The report said: “The constrained liquidity in the banking system occasioned by the series of debits is resulting in increases in the effective cost of funds across the banking system, with the recent moderation in savings rate and falling interest rate on term deposits just moderating the impact.
Beyond doubt, we believe a gradual refund of excess CRR will have more positive impact on overall lending rates, spur credit demand and support the productive sectors of the economy.”
It will be recalled that in the communiqué issued at the end of their meeting in September 2020, members of MPC attributed the increase in lending in the economy to the CRR and LDR policy and urged CBN to intensify such measures.
