Following the decision of the Monetary Policy Committee to increase the cash reserve requirement, financial analysts have said that borrowing cost will shoot up by a maximum of five per cent.

The Managing Director, Financial Derivatives Company Limited, Mr. Bismark Rewane, said in a report made available to our correspondent on Friday that the hike in CRR would reduce total bank deposits available for lending by an estimated of N274.32bn.

He said, “The impact of a 400bps hike in CRR is expected to significantly affect the lending ability of banks. The amount of cash that banks have to keep with the CBN will increase, thus lowering the volume available for transactions. As a result of this, we expect borrowing costs for individuals and companies to increase by an estimate of two to five per cent.

“According to the CBN’s annual report for 2011, total bank deposits were N6.86trn. Using this figure as a proxy, the initial CRR of eight per cent led to an estimate of N548.8bn being withdrawn and kept with the CBN; at 12 per cent, N823.2bn will be deducted. Thus, the 400bps hike will reduce bank deposits available for lending by an estimate of N274.32bn, a quicker way of mopping up liquidity. This could lead to an additional increase in banks’ cost of funds by about 100 to150bps.”

The MPC, penultimate week, increased CRR from eight per cent to 12 per cent and left the Monetary Policy rate at 12 per cent. It also reduced the foreign exchange Net Open Position of banks to one per cent, from three per cent. The apex bank’s decision was premised on the need to stabilise the exchange rate and tighten liquidity.

Rewane pointed out that the withdrawal of liquidity was expected to push money market rates higher than their recent levels, adding that the reduction in the NOP would result in banks having less forex to trade with.

“This, we expect will increase the demand pressure at the inter-bank market and a possible widening in the spread between markets. Notwithstanding, we expect a relatively stable naira in the short term in view of the 200bps reduction in banks’ NOP,” he said.

He, however, said that Tier 1 banks would remain insulated due to the cheap funds available to them.

He said, “Manufacturing companies face challenges as their cost of borrowing increases. We expect a further rise in bond yields.”

The FDC boss added that value of cheques in Lagos declined by 5.21per cent in June to N1.52tn.

Source; Punch