February 5, 2024/CSL Research
In another circular released on Friday, the Central Bank of Nigeria (CBN) announced changes around Cash Reserve Requirement (CRR) debits. Essentially, the circular states that the CBN will 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.
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%. The CBN noted that 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.
In a bid to stimulate lending to the real sector, the Central Bank of Nigeria (CBN) implemented a directive on July 3, 2019, requiring banks to maintain a minimum Loan-to-Deposit Ratio (LDR), calculated as the loan to funding ratio, of 60%. This threshold was subsequently raised to 65% later that same year. The computation of the loan to funding ratio involves considering not only loans to customers but also state government bonds, corporate bonds, and any unquoted equities held by the banks in the numerator.
To incentivize lending to Small and Medium Enterprises (SMEs), Retail, Mortgage, and Consumer Lending, these sectors were assigned a weight of 150% in the calculation of the LDR. For the denominator (funding), the computation includes in addition to Customer Deposits, all borrowings, debt securities (excluding Additional Tier 1 capital instruments), and intervention funds.
In our assessment, the initial segment of the circular presents a predominantly favourable outlook for banks. The historical pattern of ad-hoc and frequent Cash Reserve Ratio (CRR) debits has been a challenge. 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. It seems 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.
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.
