Liquidity Crunch: CBN Credit To Banks Rise 91% To N4.44trn In Four Months
Deposit Money Banks (DMBs) and merchant banks operating in the country between January and April 2021 have borrowed N4.44trillion from the Central Bank of Nigeria (CBN), InsideBusinessNG can report.
This figure is a 91 percent increase over the N2.33 trillion credit to the DMBs and merchant banks from the apex bank between January and April 2020.
Also, InsideBusinessNG gathered that DBMs and merchant banks’ deposits with CBN dropped by 27 percent to N1.53 trillion between January and April from N2.11 trillion reported between January and April of 2020.
The Standing Lending Facility (SLF) allows banks, others to quickly cover short-term liquidity requirements while Standing Deposit Facility (SDF) is also a monetary policy operation used by CBN to absorb deposits from DBMs, others, without involving the use of government securities as collateral in return.
The trend in the first four months showed that banks borrowed more than they lent at the window, due to the liquidity condition in the banking system, with applicable rates for the SLF and SDF at 12.5 percent and 4.5 percent, respectively.
The CBN in 2019 had said it would no longer remunerate daily bank deposits in excess of N2 billion placed at its SDF on the drive to support the Loan-to-Deposit Ratio (LDR) policy of 65 percent.
Analysts have linked the liquidity crunch in the country to the increased borrowings by the DBMs and merchant banks from the apex bank in the first four months of 2021.
The Managing Director, Highcap Securities Limited, David Adnori expressed the growing customers’ demands from DMBs and merchant banks is responsible for the hike in borrowing from CBN as the liquidity crunch bites harder.
“There are two reasons why banks may borrow heavily from the CBN. The first has to do with when an economy is booming as this creates opportunities for the growth of the banks. There are always demands on banks for credits as borrowers go to banks to access funds.
“The banks’ balance might not be enough to meet customers’ borrowers, forcing them to borrow from CBN to lend to customers demanding for credit.
“The CBN itself may not have much money and it might issue new money and borrow it to the banks which the bank will lend to customers” according to Adnori who noted that, that is the method in which money is printed by CBN in a normal economy.
“These are routes through which new money enters the economy.”
He explained further that “The second reason why banks visit CBN to access money is when there is a liquidity crunch in the system.
“Depositors as you likely know always give money to banks. The bank will try and access funds through the inter-bank market and if they cannot, they try CBN as the lender of last resort to borrow money as a move to boost their liquidity position.”
He explained that the hike in 2021 borrowing by DMBs and merchant banks is due to stability in the nation’s economy.
In his words, “Why 2021 credit doubled when compared to last year was that economy was depressed last year because of COVID-19 lockdown. Remember also, that the interest from banks was low.
“This year, that economy is getting back, interest rates have increased and banks are lending to borrowers. They can now visit CBN and borrow money at a cheaper rate and make a profit on the borrowing.”
Research Analyst, Abayomi Peters said the 91 per cent increase in SLF is due to liquidity challenges in the sector.
According to him, “The increase may have been the impact of the prevailing liquidity conditions in the banking sector.”
He explained further that “As we know, the CBN retained its tight stance on monetary policy, in its bid to maintain price stability and put a lid on inflation.
“Most of the lending from the CBN would have gone to tier-II banks and merchant banks as they felt the brunt more during the period.”
However, the apex bank in its January 2021 Economic Report explained that DMBs and merchant banks made more placements than borrowings in the Standing Facilities window in January 2021.
According to the report, “Total request for the SLF that was granted from January 1–31, 2021 was N492.50 billion, made up of N68.30 billion direct SLF and N424.20 Intra-day Lending Facilities (ILF) converted to the overnight repo.
“Daily average was N35.18 billion in 14 transaction days from January 1–31, 2021 with a total interest of N0.29 billion.
“Total SDF granted, during the review period, was N528.33 billion with a daily average of N26.42 billion in 20 transaction days from January 1-31, 2021. Daily requests ranged from N4.70 billion to N42.59 billion.”
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