Monetary Policy | |
Monetary Policy | |
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Friday, October 18, 2019 /12:17 PM/ By CSL Research / Header Image Credit: Central Bank of Nigeria
Yesterday, banks across the country were given a
directive from the Central Bank of Nigeria to cancel any customer requests for
purchase of Treasury Bills at Primary or OMO auctions, if such customers are
borrowing customers of such banks or those of other banks. This also includes
those enjoying CBN intervention loans. We are not certain what the CBN plans to
achieve with this directive but we believe it may not be unrelated to the CBN's recent efforts to promote lending to the real sector by commercial banks.
The CBN had in July 2019 sent a circular to all Deposit Money
Banks (DMBs) mandating that they maintain a minimum Loan to Deposit Ratio (LDR)
of 60% by September 2019 subject to a quarterly review. Barely three months
after the first circular, the apex bank raised the bar, mandating banks to now
maintain a minimum LDR of 65% by December 2019. The punitive measure for
non-compliance by DMBs is a levy of additional Cash Reserve Requirement (CRR)
equal to 50% of the lending shortfall of the target LDR and some banks were
debited in September 2019 for failure to meet the 60% minimum.
Forcing banks to lend under the current macro-economic
situation, with stringent capital and cash reserve requirements will only
result in banks resorting to ingenious ways to meet these requirements and we
believe this may be the reason behind CBN's new directive. While the objective
of the CBN is clear in terms of improving the flow of credit to the private
sector to stimulate growth, we are concerned that these unorthodox methods
being deployed to achieve this aim may have many unintended negative effects.
We are also not certain how CBN intends to monitor compliance.
That said, we believe the banks will continue to explore
other ways of meeting CBN's requirements without significantly directing loans
to the real sector. Recently, many banks have begun to show renewed interest in
corporate and state government bonds which were previously unattractive to
banks considering risk and reward. These assets do not qualify as liquid assets
and as such are expected to be treated as loans.
We reiterate our view that forcing banks to lend under
the current macro-economic situation will only result in a buildup in NPLs in
the medium to long term given the sluggish growth in the economy and the high
risk in the operating environment- this could pose a risk to financial
stability. We also expect banks' margins to be squeezed and capital positions
of many banks to worsen. Already, we have observed that banks that had plans to
issue bonds to increase their capital position have been holding off as this
will only worsen a bad situation.
In the short term, we expect yields on loans to decline
as banks push more loans to customers at lower yields in a bid to meet the CBN
requirement. Furthermore, we expect cost of funds to also decline as banks
become less aggressive at sourcing deposits.
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