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Tuesday, June 6, 2023

CBN Reserve Ratio Stifles Lending as Banks Profit from Higher Rates

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Nigerian banks are sidestepping steep regulatory reserve ratio requirement to book growing profit from higher interest rates on investment securities.

As the regulator continues to demand that banks keep more of their cash parked with the Central Bank of Nigeria (CBN), the monetary policy makes it practically difficult for them to extend credit to a struggling economy.

Lenders are mandated to hold 32.50 percent as reserves, one of the highest in the world as the CBN seeks to control inflation that has refused to cool its rage.

For instance, for the first three months through March 2023, the nine largest banks have parked N11.03 trillion of unrestricted cash balances with the CBN, which is 17.75 percent higher than 2022’s N9.36 trillion, according to data gathered by MoneyCentral.

Mandatory reserve deposits with central banks represent a percentage of customer deposits (prescribed from time to time by the central bank) which are not available for daily use.

Analysts have warned that excessive cash reserve requirement (CRR) hinders banks from turning on lending to manufacturers who are reeling from a myriad of challenges such as foreign exchange illiquidity, deteriorating infrastructure, and multiple taxes and hefty levies.

Even when the loans are available, they are extended to the real sector at a cut throat interest rate that discourages borrowing.

And the recent tightening cycle of the central bank further compounds the woes of businesses who will be borrowing at much higher interest rates and at the same time finance costs are being bloated, which undermines profitability.

Analysts have criticised the central bank for its incessant debit of huge amounts to lenders for not meeting the minimum of 32.50 percent CRR threshold it stipulated.

Nigerian banks parted with a sum of N838 billion in CRR debits from the Central Bank of Nigeria (CBN) in 2021, according to data from the Apex Bank.

“It’s a measure originally meant to be used to provide a buffer for banks and prevent exuberance in lending as well as create a safety net for banks, in the event of extreme liquidity needs. Whilst the fore is the primary purpose of CRR, the secondary rationale is to use it to control system liquidity,” said Rasaq Abiola, former head of investor relations at United Bank for Africa (UBA).

“However, the CBN has turned the CRR to a liquidity management tool, and it technically uses it to reduce the cost of managing FX, as the CBN believes that leaving the liquidity in the banking system would mean there is money to fuel demand for FX, which the CBN wants to prevent as it continues to suppress FX demand,” said Abiola.

Abiola said the alternative to CRR would have been for the CBN to issue more OMO bills which would come at a cost to the CBN. So sterilising funds through the CRR is a way of mopping liquidity at no cost to the CBN.

In spite of the fact that the CBN hiked the minimum loans to deposit for lenders to 65 percent in 2019, only few deposit money banks (DMB) have passed the threshold.

“Every bank has its peculiarity of lending to the real sector in terms of existing exposure to clients; how are those funds performing? Also, the kind of deposit they have to extend lending to the real sector. Lending to the real sector is not something that can be regulated,” said David Adnori, Vice President, Highcap Securities Limited.

It appears lenders have still not tuned on the tap of lending even after the coronavirus pandemic as they are cautious of a slow economic growth and the ability of businesses to honour financial obligations given the weak consumer purchasing power.

Overall growth fell to 3.10 per cent in 2022 from 3.40 per cent in 2021 according to new GDP results from the National Bureau of Statistics.

The combined loans and advances of the nine largest lenders hit N22.77 trillion as at March 2023, which is 8.56 percent higher than 2022’s N20.97 trillion.

Nigerian big banks are however thriving amid uncertainties and a tough regulatory environment.

The ten lenders saw their combined profit after tax (PAT) increase by 35.28 percent to N323.18 billion in March 2023 from N238.88 billion as at March 2022.

The industry return on average equity (ROAE) increased to 21.13 percent in the period under review from 15.77 percent the previous year.

Of course, the major driver of profit was booming interest income on the back of a high yield environment as they are benefitting from juicy yield handed to them by the central bank’s aggressive hiking exercise.

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