DMBs Borrowing From CBN Drops By 98.4% On Increased FAAC Injection
Borrowings by the Deposit Money Banks (DMBs) from the Central Bank of Nigeria (CBN), known as the Standing Lending Facility (SLF) have declined by 98.4 percent to N57.14 billion in October 2023. It was N3.56 trillion in the preceding month.
The decline in banks’ borrowing followed an improvement in the liquidity position of the banking system that was influenced by injections of N1.80 trillion by the Federation Account Allocation Committee (FAAC), to the three tiers of government in August 2023 from N1.89 trillion disbursed in the previous month.
The monthly breakdown revealed that DMBs in January borrowed N528.16billion from the CBN but the figure dropped to N453.7billion in February 2023.
In March, it rose significantly by 776.22 percent to N3.98 trillion, the second highest after N4.47 trillion recorded in April 2023.
However, the CBN data showed N590.29 billion and N235.06 billion borrowings for May and June 2023.
In addition, SLF’s figure stood at N908.43 billion in July and N1.77 trillion in August 2023.
Conversely, DMBs deposited with CBN through the Standing Deposit Facility (SDF) increased to N2.95 trillion in October 2023, representing an increase of 273 percent from N790.9 billion in September 2023.
In the last 10 months of 2023, DMBs have borrowed N16.61 trillion from CBN, representing a 48 percent increase from N11.15 trillion reported in the 10 months of 2022.
The applicable rates for the standing deposit facility and standing lending facility increased by 50 basis points to 11.50 and 19.50 percent, respectively, following the hike in the policy rate by 50 basis points to 18.75 percent in June 2023.
The Central Bank has consistently maintained a hawkish monetary policy stance since May 2022, to rein in inflation.
At its last Monetary Policy Committee (MPC) meeting in July 2023, the CBN raised its benchmark interest rate to 18.75 percent.
Commenting on DMBs borrowing from CBN, The Chief Executive Officer of the Centre for Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf stated that, “This is a reflection of liquidity pressure some of the banks are going through. The facility is typically short-term.
“This may not necessarily indicate that banks are stressed or unstable. Meanwhile, the recapitalisation of banks is long overdue. The minimum capital requirement of N25 billion is no longer adequate if discounted for inflation.”
The financial data also revealed that in September 2023, banks and merchant banks deposited N601.57 billion, representing a decline of 18.5 percent from N738.03 billion in August 2023.
SDF so far this year has witnessed significant patronage as banks and merchant banks deposits reached the highest peak of about N876.87 billion in July 2023, the highest so far this year.
The applicable interest rate on SDF moved to 15.75 percent in an asymmetric corridor of +100/-300 basis points around the 18.75 percent MPR in July 2023.
The Monetary Policy Committee of the CBN unanimously narrowed the asymmetric corridor from +100/-700 to +100/-300 basis points around the MPR.
However, the CBN has over the years maintained that strong patronage at the SDF confirms healthier liquidity in the banking system.
CBN had maintained that the strong patronage at the SDF confirmed healthier liquidity in the banking system, stressing that banks and merchant banks were in search of better yields.
InsideBusinessNG can report that the current inflation rate in Nigeria (26.72 percent of September 2023) is above yield on Treasury bills (T-Bills) and DMBs are looking for risk-free investments, which SDF has provided since the MPR hike.
“Furthermore, activities in fixed income securities have increased as investors navigate difficult economic conditions and underlying pricing pressures in search of better yields,” according to CBN.
InsideBusinessNG gathered that DMBs between January and October 2023 have deposited N8.34 trillion with CBN, an increase of 158 percent from N3.24 trillion in the corresponding period of 2022.
Analysts stated that financial institutions prefer depositing with CBN as it is safe and risk-free, stressing that the present business environment has forced banks and discount houses to lend cautiously in the real sector.
Speaking with InsideBusinessNG, the CEO, Wyoming Capital & Partners, Tajudeen Olayinka, noted the surge in banks’ deposits with CBN owing to uncertainty in the business environment over rising insecurity, among others.
He stated that, “The most significant factor is the increasing level of threat in the environment of business in Nigeria, arising from insecurity, supply chain problems, rising inflation and poor purchasing power, low level of productivity, rising unemployment, liquidity overhang and paucity of risk-free financial instruments.”
He added “As a result, most banks prefer to be debited by CBN for running short of LDR limit, as against extending credit to businesses that are finding it difficult to survive. It is all about managing risk.”
The Chief operating officer of InvestData Consulting Limited, Ambrose Omordion stated that CBN is the last resort where DMBs deposit excess liquidity that comes with an attractive yield.
He explained that, “When a bank goes to borrow from CBN, it is a sign the bank is having liquidity challenges. The latest report by CBN revealed stability in the banking sector and most of them have a strong capital base to lend to the real sector and expand.
“The LDR policy of CBN is meant to encourage banks to lend to the real sector and of recent, the private sector lending has witnessed a trajectory and a bit of disruption due to the hike in global interest has slowed down customers borrowing from the banks. The hike in interest rate has impacted the cost of funds, which is expected to change the direction on who banks lend to customers.
“For me, the growth in deposits with CBN is a sign that these banks have enough liquidity and are taking preventive measures to checkmate Non-performing Loans (NPL). In addition, the high interest of seven per cent depositing with CBN is also another alternative for banks to make more money and improve on profitability.”
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