Treasury Bills, Bonds: CBN to Limit Banks’ Investment

• Retains MPR at 13.5%, CRR at 22.5%

Obinna Chima, James Emejo and Nume Ekeghe

The Central Bank of Nigeria (CBN) is to limit Deposit Money Banks (DMBs) access to government securities to redirect their lending focus to the private sector.

CBN Governor, Mr. Godwin Emefiele, said yesterday in Abuja that the intention was to stimulate growth in the economy.

The CBN unfolded its new policy direction on banks’ access to investing in treasury bills and bonds just as the apex bank further resolved to hold all parameters of monetary policy constant by retaining the Monetary Policy Rate (MPR), otherwise known as interest rate, at 13.5 per cent.

The MPR is the rate at which the CBN lends to commercial banks and often determines the cost of borrowing in the economy.

It also retained the asymmetric corridor of +200/-500 basis points around the MPR; left both the Cash Reserve Ratio (CRR) at 22.5 per cent and Liquidity Ratio at 30 per cent.

Emefiele, who read the committee’s communiqué at the end of the two-day Monetary Policy Committee (MPC) meeting in Abuja, said in arriving at the decision to hold all rates at current levels, nine members out of 11, voted to hold all parameters of monetary policy constant. Two members voted, however, to reduce the MPR by 25 basis points.

He said: “As in the past, the committee considered the options of whether to be more accommodative, tighten or hold its position. The committee felt that although the slight inflation uptick should result in tightening, it felt that doing this will limit the ability of DMBs to increase credit at this time, given the need to support or redirect the focus of DMBs to new credit in support of consumer, mortgage and other priority sectors of the economy, including, SMEs, agriculture and manufacturing.

“It also felt that given the fragile state of the economy, increasing the cost of credit would further diminish investment flow and impact negatively on output growth.

“As regards loosening, some members felt that it was desirable to aggressively stimulate growth, restart the capital market activities and increase lending at lower rates; which would ultimately stimulate domestic aggregate demand.

“Those against loosening felt that given that there was a marginal increase in headline inflation for April 2019, there is need to restrain from loosening in order not to exacerbate inflationary pressures.

“They also felt the economy would experience liquidity surfeit and without corresponding increase in real sector output, inflationary pressures could be elevated; resulting in likely exchange rate pressures.

“As for members who favoured a hold position, maintaining monetary policy rate at its present level was essential for better understanding of the momentum of growth before determining any possible modifications.

“They also felt that retaining the current policy stance provides an avenue for evaluating the impact of the Bank’s intervention policies to support lending to the priority sectors of the economy.”

The CBN urged government to ensure increase in tax revenue to enable it to fund its budget adequately.

Emefiele said the MPC particularly expressed concern at the development whereby banks abandoned their key roles of stimulating growth by investing in government instruments at the detriment of the economy.

He also highlighted some measures to address the situation.

He said: “The truth is that yes, according to our own regulations, there is a particular minimum percentage of treasury bills or government securities that the banks must invest in, in order to remain liquid. But again, we have observed and unfortunately and increasingly so, that the banks, rather than even focusing on granting credit to the private sector, they tend to direct their focus mainly on buying government securities.

“The MPC has frowned on that and has directed the management of the CBN to put in place policies or regulations that would restrict the banks from unlimited access to government securities.

“It is important and expedient that the committee gives this directive to management because this country badly needs growth. For us to achieve growth, those whose primary responsibility that it is to provide credit, who act as intermediaries in providing credit and are called catalysts to credit and growth in the economy must be seen to perform that responsibility.”

According to him, it is unfortunate that rather than perform their responsibility to the private sector that is the engine of growth in the economy, banks are directing liquidity to other sectors of the economy.

The CBN governor said the apex bank would implement the directive of the MPC.

On the issues that have discouraged banks from lending to the real sector as well as the Non-Performing Loans (NPLs) in the industry, Emefiele said measures would be taken to mitigate losses.

Providing update on the level of bad debts in the industry, the CBN boss said: “If you recall, the prudential is that banks should have maximum of five percent in NPLs. I must say at this time it is about 19 per cent on the average which is a significant improvement from where it was a year or two ago.

“About a year or two ago, it was close to 15 to 17 per cent and moderating to 10 per cent I would say is a substantial and significant and encouraging improvement in the level of NPLs.

“And I do think that with the steps that would be taken by the CBN to support the bank through administrative, legal and regulatory framework, that certainly we would see to it that NPLs are brought down so that deposit money banks can be encouraged to go back and begin to lend more aggressively to those sectors that they consider to be risky.”

Commenting on the MPC decision, an analyst at Ecobank Nigeria Limited, Mr. Kunle Ezun, backed the decision of the MPC.

He, however, called for a reduction of the MPR at the next meeting to support real sector growth.

Speaking in a telephone interview, Ezun said: “For me, I think what the MPC did was the best thing by keeping the rate for 13.5 per cent points for the policy rate and keeping the asymmetric corridor at +200/-500 basis points.

“If you cut the rates in an environment where you have exchange rate as a monster, it becomes a big issue because the idea is that the rate becomes so low that people could get naira at a cheap rate to purchase forex. So keeping the rate at 13.5 per cent is the best in the interim.”

On his part, the CEO of Stanbic IBTC Nominees Limited, Mr. Akeem Oyewale, said: “From the information the MPC provided, it means that right now there is still need to observe the impact of the transmission mechanism of the recent cut in MPR earlier this year.

“They still want to observe the market. There are usually lags in cutting rates and the intended impacts in the economy. You could recall that the MPC just cut the MPR this year.

“The MPC is privileged to have access to a lot of information and in reaching the decision that it took, I believe that it must have been the optimal decision in the views of the MPC.

“The market likes stability, so if there is stability in the MPR, then investors can at least plan as against having massive swings in rates.”