Experts have identified the Cash Reserve Ratio, CRR, as the main impediment to bank lending to the real sector, which has continued to impact negatively on the economy. They believe that the high level of the CRR is depriving the banks the liquidity required to undertake serious lending to the productive sectors of the economy as they are compelled by regulations to warehouse these funds with the Central Bank of Nigeria, CBN.

The Cash Reserve Ratio, CRR, is a regulatory requirement compelling banks to maintain a certain liquidity position with the CBN as reserve funds for the banks against any emergency. The fund also covers interbank transaction to ensure that banks don’t default. At the present the CRR stands at 22.5 percent of the banks’ trading capital.

However, analysts and other experts are concerned about the negative impact of this on the banks in performing their intermediation functions in the system as they are denied almost a quarter of their capital which is left idle and contribute nothing to their bottom-line. They insist that the purpose for keeping the funds which is to avoid interbank default and possibly system collapse through a contagion effect, has hardly been achieved as banks still run into trouble in spite of it.

It has often been said that for deposit money banks, DMBs, it costs money to keep money. But the apex bank has as a matter of regulation and core focus to keeping banks fit and stable, sterilized 22.5% cash reserve ratio on deposits credited to individual banks in Nigeria on a regular basis. It suffices to say that the CRR rate applies to banks total deposits does not earn any interest for the banks, some analysts told BusinessHallmark.

Analysts attributed the bearish stance of banks on lending to a number of factors including the capped CBN’s cash reserve ratio. To ensure proper functioning of the financial system, the Central Bank regulates credit creation using the reserve demand, but the apex bank has indicated interest to make the withheld deposited funds available to any bank that wants to support government preferred or priority sectors with loans that attracts single digit interest rate.

It would be recalled that Director of Banking Supervision, Abdullahi Ahmad at the end of Bankers Committee meeting held in Lagos last year said; “We can refund the CRR of a bank that has engaged in lending in a new project or an existing one in the agriculture or manufacturing sector as a way of utilizing the CRR. So, anytime a bank lends to manufacturing or Agriculture at the rate the CBN has prescribed, it would have its CRR refunded up to the amount it has lend. The guidelines are coming up any moment from now”

Reduced loanable funds reduce the impact of banks to function effectively especially in the core area of lending. The size of loan portfolio is limited to funds available for lending by operators, capped at 80% of the total deposits. Though, many banks are in the habit of beating the line but analysts said they are unsure if those involved are being punished.

In their separate financial statements, BusinessHallmark observed that there is change in pattern as to where banks are making money. The banking sector decline in interest earnings assets resulted in lower interest income and this was similar position across the industry at the end of the first quarter 2019.

Equity research analysts including Vetiva Capital, Afrinvest, and Cardinalstone among others are already projecting that banks earnings would come from non-interest related businesses in 2019. Though some pointed at macroeconomic situation, with slow growth recorded so far, they say industry loans book may likely remain flat.

The nation’s macroeconomic data show that domestic economy has not been performing, as growth in gross domestic products has been slow in the recent time. The industry’s data also showed that average lending rate has been steep, which also raise average cost of production in the manufacturing segment of the economy.

Pricing inflation rate into average prices of goods and services contributed to reduced turnover among companies in the fast moving consumers segments, with some threatening to leave the economic space for another country with stable business environment in terms of access to credits, low energy cost and productive labour forces as well as supportive economic policy direction.

Some pundits said that decline in lending has partly contributed to increased numbers of people without jobs in the last 2-3 years. As at the last count in 2018, unemployment rate rested at 23.1% with some 55% of the youth class outside the labour force.

A significant number of banks have been operating on low gear in loan booking, therefore pulling plug on private investments. Access to long term loans has been quite difficult, some business owners told BusinessHallmark.

Coronation Merchant bank in a note said that the CRR set by CBN is a major impediment to industry loan growth. The firm stated that loan growth that over the last three years has been far from impressive and understandably so. Banks have remained overly cautious.

The clearest reason for banks not to lend in 2018 was the juicy yield available in risk free interest rate products, notably, open market operations of the CBN, and T-Bills, as many financial analysts have noted.

A financial analyst who prefers not to be mentioned said that, “Taking position in the fixed income market to reflect bottom line is going to end. Yields on fixed interest rate assets are already moderating. Again, the CBN has taken step to nail earnings from securities, and that would force banks to start lending, again”.

“When a bank’s weighted average deposits increase, the CBN debits their accounts for the increase. However, when weighted average deposits reduce, the CBN does not reimburse their accounts”, analysts at Coronation Merchant bank noted.

During their earnings call, management of tier-1 bank, GTBank with 10% year on year deposit growth, disclosed that their effective CRR was as high as 30.5%.

“One can only imagine what some of the smaller banks are going through”; Coronation Merchant banks stated.

Mr. Kingsley Ezoh, a senior consultant with LSintelligence said that cash reserve ratio on deposited funds combines automatically to reduce loanable funds. It is direct debit. You would observe that loans to deposits ratio guideline set by the apex bank are 80%. What does that means to customers? It is double edge sword; it makes the CBN comfortable but reduces the    capability of banks to book more loans.

“The reserve ratio demand by apex bank is to curtail the amount of loanable funds available to banks. Too much credit would jerk up inflation as demand would normally exceed supply if there is too much to spend, all things being equal”.

It would be recalled that the CBN gave banks choice to use their sterilize funds to support some segment of the economy with single digit interest rate. The use of commercial papers which some high balance sheet firms with strong credit standings are using is a version of the proposal, some analysts told BusinessHallmark, although basically private sector oriented.

They say that the CBN understands that there is need to reflate the economy to improve performance. But the apex bank’s focus on price and financial system stability gives no room for adjusting benchmark interest rate. With improving assets quality, banks are well position to follow up by creating credits, Ezoh said. “But this is not likely to happen with the high level of the CRR”.

In an attempt to reduce interest rate obligations, some big balance sheet companies are however leveraging on commercial papers in the recent time due to lower cost of funds. There have been series of offer in 2019 from companies like Dangote, and some banks are not left out in this development.


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