LDR, CRR: CBN Limits Banks Liquidity to Manage FX Pressure

Analysts have explained that the Central Bank of Nigeria (CBN) policies is putting banks on tight corner follow serial debits for failure to meet loans to deposits ratio target.

Analysts are interpreting the apex moves as a way to curtail banks from participating in the foreign exchange market.

MarketForces gathered that some foreign investors have been unable to exit the country due to foreign exchange scarcity.LDR, CRR: CBN Limits Banks Liquidity to Manage FX Pressure

The nation’s external reserves settled at $36.316 billion at the weekend.

Amidst economic lockdown, there is wide gap between the official and parallel market rates.

This follows the 16% difference between the Nigerian Autonomous Foreign Exchange and parallel market rates.

This has reversed the convergence sought by the apex bank, thus make possible arbitration more probable.

Following the trend, investment banking firms explained that it appears the CBN is emasculating lenders using monetary policies to limiting liquidity.

The target being to lower participation in foreign exchange market.

Not having free cash to play means banks would automatically not able to make foreign exchange request.

For naira stability, lower demand for dollar gives the CBN buffer to intervene strong in the foreign exchange market.

Already, with its policies, 92.5% of deposits taken by banks are under the CBN control, thus limiting lenders from participating in other available investment windows to boost earnings.

In a recent report, Tellimer stated that it seems the apex bank is protecting FX market by curtailing banks participation.

Recently, due to pressure on external reserves, the CBN devalued Naira from N305 to N360 in what it termed as an adjustment.

Explaining its view, Coronation said that in the previous week, the CBN recorded a decline in its FX reserves, which fell by US$82.09 million to US$36.50 billion.

“This was a much slower rate of attrition that seen for most of this year, indicating that the CBN did not supply many US dollars to the NAFEX market or the investors & Exporters Window( IEW)”, it added.

Currency depreciation was very slight, with the Naira falling by 0.32% to N387.75/US$1 in the NAFEX market and closing largely flat at N450.00/US$1 in the parallel market.

Coronation said, “with the recent rise in its reserves we think the CBN has breathing space and can maintain a  spot rate close to the current NAFEX rate for several months”, analysts explained.

In 9 months, the CBN quarantined N2.3 trillion in the banking sector for failure to meet its 65% loans to deposits ratio, thus curtailed ability to create credits.

Except for specific reasons, experts explained that this is in sharp contrast to the behaviour of other central banks around the world, which are actively injecting liquidity into the markets.

Currency traders told MarketForces that the apex bank is muzzling banks from playing strongly in the foreign exchange market.

With 27.5% being sterilised, plus 65% loans to deposits ratio there is just 7.5% of deposits collected that are available for trading on opportunities.

Analysts however noted that, due to the CBN non refund policy, many banks effective CRR is more than 27.5%.

“It is often pointed out that the cash reserve ratio (CRR) of 27.5% imposed on the commercial banks is designed to manage, if not restrict, liquidity.

“But this is a restriction on banks, not their depositing clients”, the Coronation Research stated in the report.

Coronation said the banks themselves are encouraged, by the Loan-to-deposit Ratio (LDR) of 65.0%, to make loans.

But, given the sluggish economy, with non-oil GDP growth just at 1.55% year on year in Q1 2020 and a contraction in the trade sector of the economy- which it considers a significant source of demand for corporate loans – banks could have excess liquidity, which makes lenders natural buyers of T-bills.

In its mystery of Naira liquidity, Coronation explained that when a currency is under pressure, you expect interest rates to go up, and the long-term (we mean 10-year) lesson is that this generally happens in Nigeria.

“But is it not happening now. A huge amount of liquidity held by investing institutions (such as pension funds and mutual funds) is seeking a home.

“The result is over-subscription for Naira T-bill and Naira bond issues, and a range of market interest rates (see sidebar) well below inflation.

“Tough times for savers, good times for issuers. See below for details of how this situation evolved”, it stated.

Coronation said, “The long-term lesson of Naira interest rates is that they rise when the currency is under pressure.

“And when the parallel market rate is N450.00/US$1 compared with an interbank (or NAFEX) rate of N387.75/US$1 (a 16% difference) then it is fair to say that the Naira is under a certain amount of pressure at the moment.

“However, market interest rates currently are extremely low with all Naira rates under the rate of inflation”.

Analysts explained that the origin of this situation goes back to the pension funds and mutual funds, which used to the beholder of the CBN’s open market operation (OMO) bills which they treated as much the same at government-issued T-bills.

“This was the case until 23 October 2019 when all Nigerian corporates (with the exception of banks trading for themselves) were barred from investing in new issues of OMO bills”, Coronation said.

OMO market was six times the size of the T-bill market at the time, so a lot of money was due to rotate, as OMO bills matured, to the relatively small T-bill market.

Market perception of CRR debits

Tellimer said, “It appears that the CBN debited the most liquid banks to deter those institutions from making huge demands in the FX market, which the central bank actively intervenes”.

FX: Naira Trades Flat as External Reserves Settle at $33.9 Billion

Sentiment in the market suggests that the CBN is actively trying to contain the banks’ cash to prevent them from buying dollars, which could push up exchange rates.

Rising inflation and the recent naira devaluation make a good case for holding foreign currency.

Nigeria currently has one of the highest CRR in Sub-Saharan Africa at 27.5%, which is more than ten times that of South African banks and about five times that of East African banks.

LDR, CRR: CBN Limits Banks Liquidity to Manage FX Pressure.

Editor note: Banks have been pressure by reduced liquidity as 92.5% is now under the CBN watch per period.