25 May 2015, Lagos – There are indications that banks gained additional liquidity of N470 billion from the harmonisation of Cash Reserve Ratio, CRR, by the Central Bank of Nigeria, CBN. The CRR is the amount of customers deposits that banks are mandated to keep as cash. Prior to last week, the CRR for public sector deposit was 75 percent, while that of private sector deposit was 20 percent.
But the Monetary Policy Committee (MPC) of the apex bank at the end of its meeting last week, decided to harmonise the CRR for public sector and private sector deposit to 31 percent. This, according to the Committee was informed by the need to curb abuses that may be occasioned by the dual CRR policy.
The Committee stated, “The Committee considered that the current discriminatory CRR on public and private sector deposits has not only constrained the policy space but could inspire moral hazard by private market participants.
Consequently, it was recognized that while additional tightening measures may not be appropriate now to avoid overheating the economy, a harmonization of the CRR was imperative in order to curb abuses and improve the efficacy of monetary policy.
Investigations revealed that the apex bank commenced implementation of the new policy last week by withdrawing N141 billionas CRR charge for increase in liquidity occasioned by the CRR harmonisation. Applying the new CRR of 30 percent, this implies banks gained about N470 billion additional liquidity from the new policy.
This is in line with analysts’ predictions on the impact of the CRR harmonisation on the banking industry. “The immediate effect of the harmonization of the CRR increases system liquidity which ultimately heightens the demand pressure on the currency”, said analysts at Financial Derivatives Company (FDC).
Commenting on the decision of the apex bank, they stated, “The MPC made a tacit move towards the easing of interest rates and an accommodative posture, by allowing for the harmonization of the cash reserves ratios to 31 percent , from 75 percent and 20 percent on the public and private sectors respectively. System-wide deposits are in a 60:40 ratio between the public and private sector.
“Based on this, the harmonization will lead to a net inflow of approximately 28 percent of total deposits. This is an equivalent of eight times the average monthly Federal Accounts Allocation Committee (FAAC) allocation. In May, the FAAC allocation was N388 billion. In the past six months the statutory inflows have led to a sharp decline in interbank rates towards 10.5 percent per annum.
The major beneficiaries of this new dispensation are the tier 1 banks mainly: FBN, Zenith and UBA. The private sector dependent institutions like Stanbic IBTC, Standard Chartered and Citi Bank will face challenges.” Analysts at Afrinvest Securities Limited also predicted that the harmonisation will lead to increased liquidty.
They stated, “Based on our estimates, using the CBN’s February 2015 data, the implied CRR for public and private sector deposits stood at 35.0 percent. As at February, public and private sector deposits settled at N3.6trillion (27.3 percent ) and N9.6 trillion (72.7 percent) respectively.
“By implication, the CBN unleashed the strings on deposits in the banking system; hence, increasing available deposits by approximately N528 billion. In our view, the expectation that the new CRR may lead to increased real sector lending may not actually be the case in the interim, given the evident risks that pervade the space. Based on management guidance, banks are not willing to increase lending expressively until the new administration settles and policy direction is ascertained.
“On the other hand, the additional liquidity into the system may be channelled to the fixed income market given the current attractive yields. This in turn may help push down yields within the short term. We wish to highlight that the full implementation of the Treasury Single Account (TSA) may also reduce the quantum of public sector deposits in the banking system.”
Razia Khan of Standard Chartered Bank however offered a different opinion. The Managing Director, Head, Africa Macro, Global Research for Standard Chartered She stated, “Implications In our view, the full impact of these measures will depend on the policy steps that are implemented soon after Nigeria’s political transition on 29 May.
Currently, with growing anecdotal reports of public-sector arrears involving the payment of salaries by state governments as well as payments to contractors, this combination of measures is likely to signal an eventual tightening of policy.
Public-sector deposits in the banking system have been under pressure for some months – following the reduction in oil prices and consequent pressure on the monthly allocation of oil earnings to the three tiers of Nigerian government (the FAAC).
Plans to eventually move to a more comprehensive Treasury Single Account (TSA) should, in future, reinforce the tightening bias of the CRR harmonisation. Private-sector deposits are expected to dominate the Nigerian banking system. The private-sector CRR hike is therefore the more important element of the harmonisation.
*Babajide Komolafe – Vanguard