Banks Funding Profile to Improve as CBN Seeks to Stop Daily CRR Debits

As the regulator continues to fine-tune policy for inclusive growth, the apex bank has said it will stop daily cash reserves ratio debit on Nigerian banks. The move, according to analysts, would reduce pressure on funding profile.

MarketForces Africa gathered that deposit money banks sustained borrowing from the Central Bank of Nigeria’s (CBN) standing lending facility window could also decline. Operators in the industry have become the latest target to clean up the system of sharp practices in the foreign exchange market.

In a notice posted on its website, the Central Bank of Nigeria (CBN) announced additional regulatory changes around Cash Reserve Requirement (CRR) debits as it affects banking operations in 2024.

In the circular, CBN revealed a plan to cease daily CRR debits of banks and apply the current CRR ratios of 32.5% for commercial banks and 10% for merchant banks on increases in banks’ weekly average adjusted deposits.

It said a CRR levy of 50% of the lending shortfall will be used for banks that do not meet the current minimum Loan to Deposit Ratio (LDR) of 65%. Godwin Emefiele, the former CBN governor raised CRR to 65% to drive real sector economic growth with improved lending.

The apex bank however said detailed information regarding the applied charges and the rationale behind the computation will be provided to ensure transparency and understanding. Many banks currently have effective CRR ratios above the 32.5% regulatory benchmark, according to analysts.

In its market update, CSL Stockbrokers Limited said the historical pattern of ad-hoc and frequent Cash Reserve Ratio (CRR) debits has been a challenge for banks.

“If the CBN adheres to the outlined plan, it could provide banks with a more predictable framework for planning. Additionally, the quantum of sterilized deposits seems unchanged as the rates remain at the same level.

“A more rational and consistent approach to these debits might even result in a reduction of sterilized deposits. However, the latter part of the circular, indicating the enforcement of a minimum Loan-to Funding Ratio of 65%, poses a more complex challenge”, CSL Stockbrokers stated.

Analysts noted that the CBN has not consistently enforced the minimum 65% ratio, and several banks currently fall below this threshold. The application of a 50% CRR penalty could potentially lead to an escalation in sterilized funds.

“This aspect introduces a level of complexity and uncertainty, especially for banks operating below the stipulated ratio.  Following the Central Bank of Nigeria’s (CBN) introduction of the 65% minimum loan-to-funding ratio in 2019, there were notable consequences”.

To meet the CBN’s deadline of December 31, 2019, for achieving the 65% minimum loan-to-deposit ratio (LDR), there was a reduction in both lending and deposit rates, according to the note.

The imperative to comply led banks to shift their focus away from increasing deposits, resulting in a decline in deposit rates. Simultaneously, heightened competition for loans emerged, contributing to a decrease in lending rates.

While it’s crucial to acknowledge that several other factors influenced these rate adjustments at that time, the decline in both deposit and lending rates was a significant outcome, the firm said. #Banks Funding Profile to Improve as CBN Seeks to Stop Daily CRR Debits#

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