Relief For Banks As CBN Stops Daily CRR Deductions

…Experts say move will increase banks’ lending

Commercial banks in the country are heaving a sigh of relief as the Central Bank of Nigeira (CBN) reversed to its old ways of calculating and deducting cash reserve requirement (CRR), a move that analysts say will see an increase in the loan books of banks.

While the move has been commended and described as one of the best news for banks in recent time, there are still questions that remain unanswered. The CBN had issued a circular titled “Cash Reserve Requirement Framework Implementation Guideline” yesterday to all banks and signed by the acting Director Banking Supervision department, Dr Adetona Adedeji.

According to the circular, the CBN is ceasing daily CRR debits and will be adopting an updated Cash Reserve Requirement (CRR) mechanism that is intended to facilitate banks’ capacity for planning, monitoring, and aligning their records with the CBN.

CRR is a percentage of a bank’s total deposits that it is required to maintain in the form of cash reserves with the central bank. Central bank across the world use it as a monetary policy tool to control the money supply in an economy and influence inflation and liquidity levels.

In Nigeria, the CRR has been set as 32.5 per cent of deposits and the CBN has in the past computed CRR daily and regularly debited trillions of naira from banks’ account but the new circular states that the determination of the segment of deposits subject to sterilization with the CBN as CRR will follow the old process.

Accordingly, it stated that in phase one of the process, the determination will utilize an incremental approach as “the extant ratio (32.5%) will be applied to increases in the banks’ weekly average adjusted deposits.”

This means that after the CRR has been debited, only the increase in the deposits will be sterilized onward. Typically what happened before the rule was changed by the previous CBN leadership was that every two weeks, if the deposit of the bank increased, the CBN will take 32.5 per cent of the increase of as additional CRR. This is the process that the CBN is reverting to.

Also, the circular noted that “CRR levy of 50 per cent of the lending shortfall will be enforced for banks that do not meet the minimum Loan to Deposit Ratio (LDR) as per our correspondence to all banks referenced BSD/DIR/GEN/LAB/12/049 dated September 30, 2019.”

LDR the proportion of a bank’s total loans to its total deposits, and is calculated by dividing the total loans by the total deposits and then multiplying the result by 100 to express it as a percentage. The CBN had set LDR at 65 per cent, thus with the new guideline, the CBN in addition to the CRR, the penalty for not meeting the LDR is 50 per cent of the shortfall of what should have been given out.

Commenting on the latest guideline, President, Nigerian Economic  Society, Professor Adeola Adenikinju, a member of the Monetary Policy Committee which had set the previous rule noted that under the previous CBN governor,  the dynamic CRR (DCRR) was introduced to compel the banks to lend instead of just buying government fixed income assets or playing in the forex account with surplus cash.

He explained that the DCRR was “designed to compel banks to do more lending and reduce their surplus cash that they could put into the forex market or into fixed income assets. Emefiele introduced the LDR, loan to deposits ratio, which is the minimum rate of deposits that banks must lend. Any bank that failed to meet the LDR, the shortfall is taken away from the bank balances and added to the CRR. Hence, the actual CRR was much higher than the 32.5 per cent.”

To Head of Financial Institutions ratings at Agusto & Co, Ayokunle Olubunmi, “this is one of the best news that the banks can have. The current rate for CRR is 32.5 but what we have seen in the era of the former CBN governor is that they don’t adhere to the rule. The CBN can just wake up and debit you anyhow. There were some banks that had over 50 per cent of their naira deposit sterilized with the CBN.”

Nine months financials of 10 banks for the period ended September 2023 showed that their CRR stood at N13.81 trillion up from N9.56 trillion a year ago, representing a 45.51 percent increase. Speaking on the LDR, Adenikinju said “the new circular has reduced how much banks could lose to failure to meet the LDR to 50 per cent instead of the entire amount, as was the practice in the past.  The new circular would also allow the banks to estimate their CRR and be able to plan more effectively.

“This would also be done weekly instead of daily. It will also now be universal among the banks instead of selective applications in the past. The 50 per cent additional CRR would be equally applied to all the banks that fall below their LDR”

On implications for banks, Olubunmi said it will enable banks to be able to plan adequately “they  will be able to know how much the CBN will sterilize and they can plan thier portfolios and their activities. That is what the banks have been complaining of. They don’t even know how the CRR has been deducted. They what to know what we are working with so that we can plan adequately.

“Secondly, we will see a significant increase in the industry loan book because a lot of banks  will be working towards avoiding the penalty  that comes with  not meeting the LDR.” However the circular remains unclear as to whether the CBN will refund excess CRR that has been deducted as well as what it will do in the case where the deposit reduces rather than increase. Leadership findings reveal that the CBN is yet to refund CRR of some merchant banks after it revised downwards their CRR from 32.5 per cent to 10 per cent.