The Central Bank of Nigeria has debited commercial banks in Nigeria a whopping sum of for failing to meet Cash Reserve Requirement (CRR) targets. Nairametrics reliably obtained this information from sources within the sector and has a copy of the list of banks that have been debited. The Central Bank also published some of this data in some Newspapers today.
The cash reserve requirement is the minimum amount banks are expected to retain with the CBN from customer deposits.
From the list of debits suffered by banks, Zenith Bank ranked the highest with about N355.9 billion while FBNH and UBA came second and third with N208 billion and N204 billion respectively. Here is the list of debits
- Zenith Bank: N355.9 billion
- UBA: N204.7 billion
- First Bank: N206.1 billion
- Stanbic IBTC: N143.9 billion
- Standard Chartered: N120.6 billion
See image below for the others
Why CRR: In January 2020, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) raised the Cash Reserve Ratio by 5% to 27.5%. The move shocked bankers who had expected the CBN to taper down on its tight monetary policies considering the economic headwinds. This was very well before the COVID-19 virus exploded worldwide.
The CBN had attributed the reason for the increase to raise the CRR is informed by recent inflationary pressure in the economy. Also, the CBN Governor stated that the decision to hold other rates was informed by the conviction of the committee members that there is a need to observe the response of the economy to several policies introduced by the Central Bank.
In the communique released by the CBN, the MPC stated that the persistent increase in the inflation rate, which stood at 11.98% in December 2019 is a source of concern. Hence, the committee disclosed that inflation above 12% is inimical to output growth in the Nigerian economy.
The CBN also imposed a loan to deposit ratio of 65% which means banks will also have to lend out 65% of their deposits. This is in line with the APEX banks push to get banks to lend more to the private sector, rather than invest in treasury bills and other financial derivative products that haven’t actually materialized in lending to critical sectors to the business.
Banks Outcry: Banks have however complained bitterly that the CRR policy especially as it has affected their Net Interest Income. CRR involves reducing the amount of money available to banks to lend further reducing their profitability. By debiting banks for failing to meet CRR targets, the CBN is effectively denying banks of the ability to earn an income in customer deposits.
Banks have also resorted to reducing its deposit drive to avoid further CRR penalties. However, banks overall deposits increased from N22 trillion in 2018 to N24.4 trillion as at December 2019. But deposit rates stagnated in the last quarter of the year growing from N23.1 trillion to N24.4 trillion. Deposits are divided into Demand Deposits at N7.1 trillion and Time, Savings and Foreign Currency Deposits of N17.3 trillion.
Most tier 2 banks also cut their dividend payment in response to a raft of hawkish policy moves to from the CBN. By cutting dividends, banks are effectively keeping some of their cash in anticipation of possible sterilization of their funds. Bank deposit with the CBN was about N6.4 trillion in December 2019 out of which reserve requirements was N5.6 trillion. Cash Reserves Requirements with the CBN was just N4.8 trillion as of September 2019.
Why is the CBN doing this? An analyst who spoke to Nairametrics on condition of anonymity remarked that this was an ugly development.
“Nobody knows what CBN truly using them for (the CRR)…but suspicion is they are leveraging to finance govt. It is really a terrible idea but then the CBN is doing a lot of development activities that are terrible ideas….e.g. rice farming, loans at 9% for entertainment sector etc. So they’ll argue all those development projects got to be paid for somehow” he remarked
Another analyst who also prefered to remain anonymous as he has not been authorized to comment, believes the banks are faced with a double whammy hence the debits.
“The CBN expects banks to hit 65% loan to deposit ration and when they don’t the bank takes a 50% CRR charge on the differential.”
For example, if a bank as a is at 60% LDR instead of 65%, the central bank will debit the banks 50% of the 5% differential as part of its CRR charge. This could be the reason behind this.
The analysis also opines this could be a move by the CBN to “block banks from going into the FX market” to make money from speculation on the exchange rate once the Covid-19 situation is over.