Author: The Nation

What does the Central Bank mean by the statement that it will no longer be a lender of last resort from 2016? This was the poser many are seeking answer to days after the pronouncement since the bank did not say much in its explanation. To The Nation’s enquiry, it said: “What this means is that while the CBN will continue with its explicit role of lender of last resort to Deposit Money Banks, Primary Mortgage Institutions and Microfinance Banks, it will not lend for transactions from December 2016.”

However, a Senior Manager in one of the tier 1 banks, explained that being a lender of last resort means a bank going to the Central Bank to borrow because it has no other place to run, so that it can continue its business. It means that the CBN will stop performing this function for the banks in 2016. The implication is that they are asking banks to sit up.

He said it implies that the banks have to be serious at risk management to be able to see the signals when things go bad. Because if they are able to see the signals, chances are that they will know when there are problems. Since they are doing their normal business, he explained, they will still be able to hold themselves by relying on the interbank. “So, instead of relying on the CBN, they could raise funds from other banks. And they will then raise the ante, in terms of marketing network, or some other ways of sustaining themselves,” the banker said.

Don’t also forget, he stressed, that a month or so ago, the CBN also raised the Cash Reserve Ratio (CRR) from 12 per cent to 50 per cent. That also is in tandem with this line of thinking. So, what that also called for is creative marketing on the part of the banks so they can get more private deposit from the private sector, rather than folding their arms and waiting for connections in government.

On whether the loans advanced to the MDBs did not amount to another discount window, which the CBN frowned at when the the present leadership came on board, the banker said: “Whether it is called discount window or anything, it simply means borrowing money from the Central Bank and that’s what the apex bank wants to stop, and they are looking at it as a way of spoon feeding the banks.”

“The banks are now entirely on their own. You stand to bear the consequences of whatever calculation or miscalculation you make, because in risk management, you either get over-exposed, because you are giving so much credit that you are not expected to. When you give out so much, what do you have as backup in case anything happens? And who are the characters you are giving the loans and in what volume and into how many places? he queried. As far as I am concerned, the CBN is trying to make sure that banks don’t get themselves into trouble, he added.

On whether this policy not crowd-out credit to the real sector, he said what is paramount is balancing of risks. His explanation: ”You know this business of banking, the whole idea is money. Even you as an individual, you know how much effort you put in managing your own finances. Not to talk about a bank which business is all about taking in business and giving out money. So what I am saying is that it is full of challenges. It is full of risks.

“And you are dealing with human beings and you are also dealing with businesses that also have their motives. You give them loans based on certain projections. Sometimes, they don’t work out. How do you get back your money? he asked, saying, even if you have houses as collateral, how do you monetise those houses to bring in money within one year! So, these are the challenges that banks face, he added.

He explained the apex bank’s underlying reason for the measure, thus: “The CBN is now saying, yes what they are doing is unprecedented, a lot has happened, within the banking environment. Having seen what has happened, especially under the current dispensation, they believe that the banks are not managing their risks properly. Risk management is it. They are telling the banks that no matter what you face, don’t come to us to borrow.”

The banker, who asked that his identity be kept out of print, said these pronouncements have implications for cost of funds.

He said since the days of consolidation, banks have attained a certain measure of bigness. “No bank is small, so it is left for the banks to know how to manage their resources,” he said, adding that in their effort to be overly profitable, or be perceived as doing well, some banks tend to be reporting hundreds of billions of profits and overstretching themselves. He said the CBN was in the best position to monitor these things, and they know that the banks will survive even with those policies the apex bank have put in place.

He agreed that cost of funds, may have gone up because of the increase in CRR, which he said has forced banks to look for deposits in other places, adding that this may have pushed the banks to raise deposit rates.

The bank’s official, said the thrust of the CBN’s pronouncement is a warning that by 2016, you cannot come to us again to borrow, insisting that the essence of it all is to help the banks operate better.

He said: “It’s not good to be spoon feeding any operator, it will make it to sit up, and be professional and ethical. If they are doing this ethically and professionally, adhering to all the tenets of corporate governance, there is no way any bank will collapse overnight.

“What it means is that instead of declaring mouth-watering profit, they will be declaring modest figures. Remember that with this policy overtime, banks will be creative and aggressive in their marketing. They will be involved in more fund sourcing.”

He said the CBN may have been studying this system for a long period of time to know that if this is done, it will not kill the banks. It would rather make them to sit up, arguing that the policy is not punitive at all, but that the CBN wants to make the banks to adjust and take proactive measures.

You don’t get performance in the air. The figures are there. 2012 results of the banks are there to celebrate. Soon after consolidation, many Nigerian banks were ranked among the first 1,000. By 2008, 2009 and 2010, they were no longer there, because of the challenges they were going through, but last year and this year, many of them are back on that list. That means things are getting rosy. And if you look at the average profit for all the banks, you may just mention one that did not return profit.

The banker termed the Nigerian Deposit Insurance Corporation’s report that only about ten Nigerian banks are healthy as a woolly statement, saying that NDIC ought to disclose the indices they used to arrive at such conclusion. “ You are in this system. which bank has collapsed, or shown signs of collapsing. For the NDIC to just say that,, what indicators did it use? Is it in terms of employment, balance sheet size, branch expansion, or what. They should have parameters for measurement,” he stated.

“That report, as you also know is not current. A lot of water may have passed under the bridge. Now we are talking about use of money. Look at the type of money the banks raised for Dangote? None of the banks has problem after that funding.”

He banks have become much bigger and banks are supposed to be catalysts in developing any economy globally. Once they perform their intermediation role, meaning they are economic agents, so, the role of banks is to take money from one agent and give to another. The CBN is saying it wants to take government money and keep the money for government.

He said all the banks have said they are global operators and that is why they can get money from international agencies and lend. They can also get their money outside this system. So, you cannot be waiting for CBN money.  The fact that the CBN Governor mentioned it now is a warning, and that warning is positive so that banks are not taken unawares, he said.

He argued that raising the CRR is not denying the banks money per se, saying the thing is that the CBN thinks the banks are being spoon- fed by having that public sector fund which the banks turnaround to lend to the various government entities again. So, these are the things the CBN is trying to stop, he said.

Also, Head, Market Risk, Greenwich Trust Limited, Babatunde Obaniyi, said the CBN’s plan to stop lending to the banks is a positive development. He said the policy has more upside than challenges. He said the banks have become lazy, relying more on government funds and using it to buy treasury bills. He said such action, does not develop any economy and should be checked. He said the banks should go into rural banking and get cheap deposits that they can lend at low interest rate. He said there is so much for the banks to gain by sourcing for cheap funds instead of relying on the CBN credit.

Obaniyi said banks should deepen their retail structure, and support lending to small businesses.

Head of Research and Corporate Development, Consolidated Discounts Limited (CDL), Mr. Jimi Ogbobine, said the financial market thrives on information, adding that once the CBN made the declaration on stopping to lend to banks by 2016, the banks are already analysing the risks involved.

He said the only way to ensure that the policy does not have a damaging effect in the financial system, means all hands must be on deck to support the CBN financial inclusion strategy, adding that the policy will motivate the banks to source for more funds that are cheaper and long-term in nature.