Amid the devastating effects of COVID-19 on businesses, commercial banks currently have the issues of Cash Reserve Ratio (CRR) obligations to grapple with.
The Central Bank of Nigeria (CBN) now debits Deposit Money Banks (DMBs) for not meeting CRR requirements.For instance, the apex bank had in June, debited 26 banks, including merchant banks to the tune of N459.7 billion for failure to meet their CRR requirements.
CRR is a mandatory part of a bank’s total deposit expressed in percentage, which a bank must maintain with the apex bank at all times, and subject to change at the discretion of the regulator.
Top five banks; First Bank, UBA, GT Bank, Access Bank, and Zenith Bank suffered a N1.9trillion debits in CRR sequester in the second quarter, between April and June 2020.
The banks have a total customer deposit (excluding subsidiary balances) of N18.26 trillion, thus CRR debits represented about 35.9 per cent of their total customer deposits as of June.
The development has become a source of worry to stakeholders in the banking sector. Senior Economist, FBN Quest Merchant Bank, Chinwe Egwim, said the CRR is currently impacting the liquidity of banks, especially as some had structured their loans up to 40 per cent, and the possibility of these loans may still exist, because only fewer number of banks made up the percentage.
“The most pressing challenges for banks are asset quality and rise in cost risk. Banks structured about 40 per cent of loan books but the possibility of this loan still existing is there despite forbearance packages. This is because the numbers that make up the percentage are few.
“Banks have to contend with downward pressure following the subdued interest rate environment and regulatory fee cuts on e- banking transactions. Another issue is the discretionary CRR debits by the CBN and its impact on liquidity.”
Professor of Economics at Babcock University, Segun Ajibola, said with CRR in place, banks that are in temporary state of illiquidity can borrow from the CBN based on its CRR with the bank.
However, he said the challenge is the fact that the fund is kept with CBN almost free of interest income, which invariably remains a substantial cost to the deposit money banks in the country.
He pointed out that aggressive drive to comply with the 65 per cent loan-to-deposit ratio (LDR) mandate to avoid being debited by the apex bank has led to the DMBs accommodating un-bankable borrowing proposals with adverse effect on their loan books.
“The issue is the debit of the shortfall in the mandatory lending of 65% of deposits imposed on deposit money banks by CBN. Any shortfall in the 65% is debited against the bank by CBN.
“This has led to desperation for lending by banks with the likely long term adverse consequences on the quality of the loan portfolio of banks in Nigeria. This may be so because in an attempt to beat the 65% loan-to-deposit ratio, banks may begin to accommodate un-bankable borrowing proposals.
“This would lead to compromising credit policies, rules and regulations. The consequences on the long run include toxic assets, high loan loss provisions with adverse impact on shareholders’ funds,” he said.
The Head Research, FSL Securities, Victor Chiazor, said the banks are directly impacted as they now have reduced funds to run their business and generate income.
He pointed out that the funds could have been directed to areas like derivatives trading, FX trading and fixed income trading, which could have helped to increase the banks’ earnings if they had these funds at their disposal.
Chiazor said: “For the CBN, the reduced liquidity in the banks helps to prevent banks from coming to the FX auctions with lots of cash, as too much FX demand tends to put the apex bank under pressure.
“To access a part of those funds the banks may have to increase their lending to SMEs, and approach the CBN to ease their CRR level on the back of their increased lensing to the real year.”
A breakdown of CRR debit by banks as at June, showed that First Bank, Nigeria’s oldest bank suffered N576 billion debits in the second quarter (Q2) of the year.
First Bank now has a total CRR debit of N1.6 trillion kept with the CBN. UBA suffered a debit of N521.7 billion in the Q2, bringing the bank’s total deposit with the CBN to N1.5 trillion.
Guaranty Trust Bank reported a CRR debit of N251.5 billion in the quarter under review, representing about 8.4% of its N2.49 trillion customer deposits. The bank now has a total of N881.6 billion in CRR debits held by the CBN.
Access Bank and Zenith Bank reported a CRR debit of N158.6 billion and 472.9 billion, respectively in the period in review. The Monetary Policy Committee (MPC) of the CBN had in January, raised the CRR by five basis points from 22.5 per cent to 27.5 per cent.
Before the outbreak of COVID-19 pandemic, the apex bank also instituted several other policy measures to boost the economy and make credit available to the real sector. One of the measures is for DBMs to maintain an LDR of 65 per cent.
For banks, which do not meet this level of LDR, the CBN introduced a sanction of debiting erring banks with an increase in their CRR to the tune of the difference in the new LDR, as a way to force them to keep more funds idle with the apex bank, instead of trading in foreign exchange, treasury bills and other open market operation (OMO) instrument rather than lending to customers.
As a result, banks are now left with lower funds to the tune of the new CRR, as the amount available for disbursement in the form of loans.
According to the MPC, raising the CRR had been crucial to curtail excess liquidity in the banking system, already adjudged as a contributor to the surging inflation trend.