The Central Bank of Nigeria, at its last Monetary Policy Committee (MPC) meeting, introduced a new variant to the Cash Reserve Ratio (CRR). It retained the ratio for private deposits at 12 per cent and raised that for the public sector. This, inadvertently, reduced the money available for lending, reports, COLLINS NWEZE.
•Race for deposits over CRR hike begins
It is common knowledge that government, whether at the centre, or states, is the biggest spender in the economy. That is why banks depend most on public sector deposits, which are often sourced cheaply from Ministries, Departments and Agencies (MDAs).
The Nigerian National Petroleum Corporation (NNPC), Nigerian Maritime Administration and Safety Agency (NIMASA) and other revenue generating bodies fall in this category. The funds which are lodged with the banks are advanced as loans to customers, whether corporate or individuals at given or negotiated interest rates.
This practice, which has seen some banks holding over 75 per cent of their balance sheet in government deposits, is being threatened by the recent decision of the Central Bank of Nigeria (CBN), at its last Monetary Policy Committee (MPC) meeting. CBN is getting increasingly worried over the rise in liquidity from banks purchasing short-term government securities using public sector deposits. The CBN fears that strong liquidity growth could trigger a rise in inflation.
The MPC’s decision to hold the interest rate steady at 12 per cent at its July 22 and 23 meeting while raising the Cash Reserve Ratio (CRR) on public sector deposits to 50 per cent is being interpreted as an indirect tightening of loanable funds to banks.
The CRR is the portion expressed as a percentage of bank’s deposit balances, which lenders must have as reserve in cash with the CBN. It is usually determined by the apex bank. The reserve ratio is one of the instruments used to influence the money supply in a country, and drain out excess liquidity in circulation from the system. By increasing the ratio, CBN has reduced the percentage of funds available to banks to lend and do business with.
Currency Analyst at Ecobank Nigeria Olakunle Ezun said the CRR move is significant given that public sector deposits which stood at N2.5 trillion at the end of March, account for around 20 per cent of total deposits in the banking system. He said aside the existing CRR funds being forfeited to the CBN, an additional N955 billion would be removed from the economy, suggesting the tightening effect will be immediate.
He said the effect of the decision was expected to be significant, with the yield curve likely to shift up, particularly at the short end, and a likely supportive effect on the exchange rate.
Before August 7, when the policy took effect, many lenders had sold liquid assets and dollars to replenish their cash balances in preparation for the withdrawal which went on as planned.
Ezun said the immediate result of the MPC’s decision would be a rise in interbank money market rates, which will increase pressure on investors to divest from longer maturity fixed income securities and to shorter dated securities.
“Not only will there be the attraction of higher yields at the shorter end of the curve, but, for foreign investors, there will be the benefit of reducing currency risk exposure by moving down the curve,” he said.
Effects on exchange rate
He said the move to indirectly tighten monetary policy was partly aimed at restoring some level of stability to the exchange rate. The naira remains volatile and has been on a depreciating trend since the start of the year. With a year-to-date loss of 2.9 per cent, the naira weakness reflects a robust import demand that has increased demand for dollar at the Wholesale Dutch Auction System (WDAS) and on the interbank market, thus, weakening oil prices.
Impact on banks
Analysts have said the new policy would have a negative effect on banks. An analyst with Renaissance Capital, an investment bank, Adesoji Solanke, said though it signals the desire to tighten monetary policy, the measure has added to the challenges facing the Nigerian banking sector this year, and on the balance, the effect is negative for the sector.
“We view the impact of this as negative for the banks. This is a new measure in addition to the 12 per cent CRR on all deposits, which we believe signals tightening of monetary policy, most likely to protect the naira,” he said.
The Managing Director, Financial Derivatives Company, Bismarck Rewane, had estimated that the introduction of a 50 per cent CRR on public sector funds equaled N650 billion quarantined, or interest free.
“The quarantined amount is equivalent to one month and two to three weeks of Federal allocations. Imagine a situation where the Federation Account Allocation Committee (FAAC) allocations are delayed, interest rates will rise sharply due to the cash shortage,” he said.
He noted that the hike of the CRR on public sector funds by 38 per cent is expected to tighten liquidity, creating a funding gap.
His words: “The commercial banks’ initial reaction will be to scramble for funds to cover their positions. To do this, banks will repurchase their Asset Management Corporation of Nigeria bonds, sell down on their Net Open positions (NOPs), or seek for more deposits from the government or private sector. The liquidity gap created at the market is expected to result in a three to four per cent spike in interest rates, which are currently at an average of 11.2 per cent per annum.”
The thinking among banks is that the policy, aside tightening liquidity, would slow down credits, increase interest rates and the delinquency of loan defaults. But the CBN Deputy Governor (Operations) Mr Tunde Lemo said issues on the CRR would be addressed accordingly via dialogue.
“Don’t forget that as banks get government deposits, the CBN mops it up at Open Market Operation (OMO). CBN cannot just move the CRR from 12 per cent to 50 per cent. It should have been a gradual process because the CBN is not paying any interest on these deposits, one bank CEO, who does not want to be named said, adding that “the equities market will be impacted. This is already happening. People will be compelled to divest from the capital market and this would cause equity bubble.”
Lemo insisted that the arguments do not hold water because 50 per cent CRR is applicable to only government’s deposits.
He said: “Liquidity cannot be tight because the stipulated liquidity ratio is 30 per cent and the average in the industry is 68 per cent. So, the excess liquidity should have gone into credits by now. Most of the banks are seating on excess liquidity.
“In fact, they collect these monies from the government and purchase treasury bills with it, and lend back to the government. The implication is that the government is spending undue percentage of their revenue to pay for their deposits with bank.”
Impact on the naira
A day after the CRR hike, the naira firmed to a four-week high against the dollar. The local currency closed at N159.9 to the dollar, its strongest since June 19.
Ezun added that as the indirect tightening takes effect, the holding capacity of banks to speculate against the naira is likely to lessen. This is because there will be a rise in money market rates, which should help underpin the naira.
A further level of support is also likely to come from banks selling dollars in order to fund short-term naira liquidity requirements.
“The initial rise in yields would also help generate an attractive entry point for foreign investors, thereby boosting capital inflows, which in turn would be naira-positive,” he said.
“The fundamental problems that the CBN faces are how to balance competing pressures on the naira that stem from the forces that drive purchasing power parity (mainly through the current account) and uncovered interest parity (via the capital account). Managing these opposing forces remains a struggle that has not been helped by high levels of liquidity that the CBN has struggled to manage effectively,” he said.
Managing Director, Afrinvest West Africa Plc, Ike Chioke, expressed concerns over both policies, saying there would be ‘unavoidable impact’ of the new 50 per cent CRR on majority of the banks going forward.
In a report, he explained that the CRR policy implied a significant increase in the banks’ cost of funds, a tensed pressure on the Net Income Margin (NIM) as a larger proportion of the deposits will be held in CBN’s coffers as reserves.
He predicted that banks may have to sell down on investment securities to call back the 38 per cent, and may re-navigate their deposits mobilisation strategies, re-price risk assets in line with their “cautious” lending strategy and adjust business model.
Consolidated Discount House Limited, however, raised strong fears on the naira’s stability, adding that CBN Governor Sanusi Lamido Sanusi will ensure the defence of the local currency till his departure from the bank.
Beyond these, it said the depletion of the naira would have strong domino effects on the system. It would lead to negative carry trade and higher import costs for local businesses. It said the single digit inflationary outlook for the second half of the year is largely anchored on stable exchange rates.
Banks’ strategic responses
Aware that the CBN is committed to implementing the policy, many banks, last week, held emergency meetings during which they reviewed the percentage of their public sector funds and how to address the likely impact of the policy on their operations.
Group Head, Retail Banking, Skye Bank, Mrs Arinola Kola-Daisi, said the only option for the banks was deposit mobilisation.
She said:” The government is the biggest spender but there is also the need to focus on retail business because of immense opportunities there, too. Banks are now mobilising deposits because that’s the only way out.”
She said banks needed to expand their retail banking bases, and improve customer services.
“The truth about the CRR hike is that there is nothing to do other than to mobilise deposits. We have a significant deposit of public sector funds. It is a tough time for everyone. Everyone is looking for institutional investors that will give them money. The banks are also building their retail banking businesses. As I said earlier, retail banking is a game of numbers,” she said.
Mrs. Kola-Daisi said banks have to focus their attention on getting deposits from other areas, stating that people must go wherever the money is to ensure that they get the needed deposits. That, she said, will make everybody sit up. It will also make people put in their best because there is no magic except to bring in more deposits. Now, all the banks are looking for one thing, it is tough, but we will get on with it.
“There is nothing we are going to do and they are not going to change the policy. We have to work with what is good for now, and make sure that we go out and get more deposits and get more customers too. You also make sure that we work aggressively on the inside to improve your services. It is one thing to bring deposit, and another thing to retain that deposit in the system”.
“Retail business is also difficult because you need to know what people want. People are not looking for complicated products, they are looking for simple, cheap and easy to access products that can add value to their businesses and lives,” she said.
Stanbic IBTC Regional Head, Nigeria, Lincoln Mali said he would be adopting the Standard Bank in South Africa approach to retail lending in Nigeria. He said that the bank is not yet strong in retail business in Nigeria but that is going to change going forward. “In Nigeria, we are not all that known for the retail part of the business and that is what my team and I are bringing into the country. In South Africa, we are strong in retail lending. We will be strong in Nigeria as well. We have started to lend in the retail part of the business,” he said.
Mali, however, said to succeed in retail lending, there should be more people bringing in deposits than the loans that are given out. Also, there is need to understand the transaction history and balance turnover with demand for loans. He said the bank will also be focusing on lending through credit cards and will ensure that its products and services are visible in every commercial part of Nigeria.
“We can’t be in the business of risk avoiding. We have to be in the business of risk management. To avoid risk, then you should not be in banking. You need to understand the risk, price the risk and manage the risk,” he said concerning the bank’s commitment to lending.
Mali said the bank is also committed to getting more of the unbanked into the financial system. “We have been thinking of how to get the unbanked into the banking system. We want to make easier for the unbanked to get into the banking system through our products and services. We have some plans here to do more of agent banking, mobile money and so on. For now, our priority is to get the retail part of our business structured in the quickest possible time. We are also looking at high net-worth individuals,” he said.
Unity Bank has also emphasised its commitment to deepening retail banking services in the country through branch expansion. The bank’s Divisional Head, Retail Banking, Usman Abaji,s said the plan is not only in line with its strategic direction, but also a natural progression from its history and antecedents of being close to the people.
Heritage Bank is also eyeing the retail sector of the business with promises of giving out loans to support grassroots businesses. The bank unveiled plans to provide funding for the micro, small and medium enterprise (MSME) sub- sector of the economy.
Speaking at the bank’s MSME Clinic held in Lagos, the bank’s Managing Director, Ifie Sekibo, expressed the lender’s commitment to assisting MSMEs to become large corporate organisations that can be quoted on the Nigeria Stock Exchange in the next three years.
Sekibo said the bank was looking beyond deposit mobilisation to assisting subsector to realising their goals, by identifying and solving challenges that challenge their businesses with a view to providing the necessary solution to make them function better.
Interest rate
Interest rates in Nigeria have been broadly stable since ending of 2011, hovering 200 basis points around the Monetary Policy Rate (MPR) that has been held at 12 per cent since October 2011. The MPR increased steadily from September 2010, from a then low of six per cent to 9.25 per cent in early October 2011 before it was raised sharply to the current 12 per cent.
This helped to reduce liquidity and strengthen the short end of the curve, along with earlier changes to indirect monetary policy instruments on 24 July 2012 the CRR was raised to 12 per cent from eight per cent and the Net Open Position of Shareholders’ funds was cut to one per cent from three per cent.
