Over N750 billion excess cash for loans to key segments of the economy may be freed as a result of the Central Bank of Nigeria (CBN) policy directing banks not to deposit funds above N2 billion at its Standing Deposit Facility (SDF) window. According to the CBN guideline announced on Wednesday, banks are expected to deposit excess funds at the CBN on daily basis, and earn interest on such funds.
The guideline which took effect today, Thursday, reduced the remunerable daily placement of SDF from N7.5 billion to N2 billion. The SDF is excess reserve funds that banks deposit at the SDF window of the CBN at the end of each business day. The Standing Lending Facility (SLF) is fund borrowed by banks from the apex bank to square up their positions in the market. The SDR attracts interest rate of Monetary Policy Rat (MPR) minus 500 basis points, which is 8.5 per cent per annum up to the limit of N2 billion, while any deposit over and above the maximum will attract zero interest rate.
According to CBN Director, Financial Markets Department, Angela Sere-Ejembi, remunerable daily placements by banks to the SDF shall not exceed N2 billion.
“With reference to the circular to all banks and discount houses on guidelines for accessing the CBN Standing Deposit Facility. The SDF deposit of N2 billion shall be enumerated at the interest rate prescribed by the Monetary Policy Committee from time to time. Any deposit by a bank in excess of N2 billion shall not be enumerated. The provisions of the circular takes effect from today”, she said
Head, Currencies Market at Ecobank Nigeria, Olakunle Ezun, said the CBN had earlier announced regulatory guidelines to stimulate lending to Small and Medium Enterprises (SME), retail, mortgage and consumer lending with mandate to banks to maintain a minimum loan to deposit ratio of 60 per cent (compared to current industry average Loan to Deposit Ratio (LDR) of 58.5 per cent as at May 2019 and regulatory maximum of 80 per cent), subject to quarterly review,
By this regulation, the CBN aims to improve market liquidity, and subsequently encourage deposit money banks to increase lending to the productive sector of the economy. This comes with additional incentive of a weight of 150 per cent to the preferred sectors in the computation of LDR.
“In the immediate, the money market liquidity is expected to rise by N750 billion, thereby lowering inter-bank market rates by 150 basis point. The CBN’s recent move could be positive, as we expect improved lending to the productive sector and reveals the risk appetite for the productive sectors of the economy,” according to him.
However, depending on market reaction and behaviour, the following scenarios could materialise. The inter-bank money market rates could further drop and average two per cent to five per cent in the days ahead. Its currently trading at a weekly average of 4.85 per cent for overnight rate and 12.25 per cent on 90-day tenored funds.
Ezun said the secondary market (discount) rate on treasury bill is expected to trade between eight per cent to 10 per cent for 91-day maturity and below and 11.5 per cent for tenor above 91-day maturity.
He said the secondary market yield on bond is expected to moderate downward to sub 13.5 per cent for tenor above five-year in short term.
While the CBN’s reason for the circular is to encourage bank to lend to the productive sector, Ezun said it is not clear how the apex bank intends to achieve this objective. “Given internal risk framework of most bank and their disposition to increase lending to riskier borrowers, potentially with looser underwriting or underpricing outlook, the risk acceptance framework will have to come to play. While the liquidity in the market will rise, the liquidity could be locked up in a large portfolio of government securities in contrast to the overall objective of lending to the real sector,” he said.
He explained that in the longer term, more stringent regulations can be positive for the economy but negative for the lending institution while stringent regulations can force bank to increase their risk appetite, which could lead to higher non-performing loan and further deteriorate the industry’s asset quality.
