Banks Shun Lending to Real Sector as Deposit With CBN Surge by 12%


Kayode Tokede

Despite the 65 per cent Loan-to-Deposit (LDR) ratio policy of the Central Bank of Nigeria (CBN) which was aimed at forcing the hands of financial institutions to lend to the real sector of the economy, banks’ deposits with the CBN has continued to witness exponential growth hitting 12 per cent Year-on-Year (YoY) as at end July this year.

According to Standing Deposit Facility (SDF) data by the apex bank, banks’ deposit since the beginning of the year has witnessed a steady increase as uncertainty continued to mount over the 2023 general elections, among other factors.

The SDF is a lower corridor of the Monetary Policy Rate at which Deposit Money Banks (DMBs) and discount houses can deposit their money overnight with the CBN for an interest rate.

Another window, Standing Lending Facility (SLF), an upper corridor monetary policy rate at which DMBs and discount houses can borrow money from the CBN at a pre-specified rate, typically the benchmark policy rate plus a margin.

The applicable interest rate on SDF moved to 7 per cent at an asymmetric corridor of +100/-700 basis points around the 14 per cent MPR in July 2022.

 The CBN has over the years maintained that strong patronage at the SDF confirm healthier liquidity in the banking system.

The applicable interest was at 4.5 per cent early in 2022 when CBN maintained its MPR at 11.5 per cent.  

According to the financial data by CBN, a sum of N2.32trillion has been deposited through the SDF in seven months of 2022, representing an increase of 12 per cent year-on-year (YoY) from N2.06trillion in seven months of 2021.

The Month-on-month (MoM) breakdown showed that banks in January deposited N296.8billion with CBN and it increased by 65 per cent to N489.05 billion in February.

The CBN in its economic report for the month of February disclosed that, “Activities at the Standing Facility window reflected ease in banking system liquidity during the review period. The total SDF increased significantly by 60.79 per cent, to N472.38 billion, from N293.79 billion in January 2022.”

CBN in the report noted that, “Subdued activities in the SLF window and the strong patronage at the SDF, confirm healthier liquidity in the banking system. Hence, key short-term interest rates declined, just as the Nigerian financial market showed resilience despite a volatile global financial market.

“Furthermore, activities in fixed income securities increased as investors navigate difficult economic conditions and underlying pricing pressures in search of better yields.”

A sum of N572.5billion was deposited with CBN in March, the highest in 2022, and in April, it dropped by 38.3 per cent to N353.32billion.

Deposits by banks through the SDF further dropped to N279.63billion and N265.31billion in May and June, respectively. It finally closed July at N60.26billion, a decline of 71.9per cent YoY when compared to N214.24billion deposited by banks with CBN in the prior year’s July of 2021.

Commenting, analysts stated that without banks’ involvement in lending, the domestic economy might not achieve the predicted growth by international agencies, coupled with other internal challenges.

Speaking with THISDAY, the CEO, Wyoming Capital & Partners, Mr. Tajudeen Olayinka, attributed the surge in banks deposit with CBN to uncurtaining in the business environment over rising insecurity, among others.

According to him, “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 that, “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, Mr. 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 bank to lend to the real sector and of recent, the private sector lending has witnessed trajectory and a bit disruption due to 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 improvement in deposit with CBN is a sign that these banks have enough liquidity and are taking preventive measures to checkmate Non-performing Loan (NPL).  In addition, the high interest of seven per cent depositing with CBN also another alternative to for banks to make more money and improve on profitability.”

In his view, analysts at PAC Holdings, Mr. Wole Adeyeye stated that banks in 2022 are maintaining effective risk management in a move to cut down NPL.

He added that: “banks and merchant banks with an increasing deposit from customers prefer to lend to CBN rather than their customers to maintain NPL below five per cent threshold.”

The Head of Financial Institutions’ Ratings Agusto & Co, Mr. Ayokunle Olubunmi explained that: “Because CBN is implementing the discretionary CRR, banks were being careful in terms of sourcing for deposits because it doesn’t make sense as a bank to get deposits and then CBN is actually holding them. So, banks are being careful with deposits.

He added that: “2022 is going to be much more drastic if the CBN does not change their stance.  Because what we have seen last year is that banks are getting a bit more reluctant to lend. If not well managed, it could cause a dysfunction in the economy.”

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