Liquidity CrunchTake Toll as DMBs, Merchants Banks Borrowing from CBN Hits N10.38trn in Eight Months

Darasimi Adebisi

Deposit Money Banks (DMBs) and merchant banks in the country have made more borrowings than placements in the Standing Facilities Window of the Central Bank of Nigeria (CBN) in the first eight months of 2021, investigation by THISDAY has revealed.

The financial data released by the CBN revealed that in the eight months of 2021, DMBs and merchant banks borrowed a total of N10.38 trillion compared to N5.09 trillion in eight months of 2020.

The financial data also revealed that, placements with CBN by DMBs and merchant banks dropped by 46 per cent to N2.23 trillion in eight months of 20201 from N4.18 trillion in eight months of 2020.

DBMs and merchant banks through the Standing Deposit Facility (SDF) on daily basis deposit excess fund and accessed Standing Lending Facility (SLF) to borrow funds from the apex bank.

In the last eight months however, the trend showed that banks borrowed more than they deposited at the window, due to the liquidity condition in the banking system, with applicable rates for the SLF and SDF at 12.5 per cent and 4.5 per cent, respectively.

Competence source hinted to THISDAY that most weak Tier-2 and Tier-3 banks often accessed the SLF to carry out their daily business transaction, stressing that without these funds, most of them might have collapsed.

Analysts attributed the increasing DMBs and merchant banks borrowing from the CBN to liquidity crunch in the system, maintaining that the Friday’s Cash Reserve Deposit (CRR) deduction is forcing an aggressive borrowing.

For instance, analysts at Agusto & Co. Limited noted that the CBN’s 27.5 per cent CRR is one of the highest in the banking reserve requirement in sub-Saharan Africa. South Africa, Kenya and Ghana all have CRR’s of below 10 per cent.

Agusto & Co. in its banking sector report stated that: “We believe the elevated CRR level moderated the Industry’s performance and liquidity position during the year under review.Assuming the sterile CRR were invested in treasury securities at five per cent, N482 billion would have been added to the Industry’s profit before taxation.This would have increased the Industry’s return on average equity (ROE) by 11 per cent to 31.6 per cent in the financial year ended 31 December 2020.”

Commenting on aggressive borrowing by DMBs and merchant banks, Head, Financial institutions, Agusto & Co, Mr. Ayokunle Olubunmi, in a phone chat with THISDAY said the hike in DBMs and merchant banks borrowing from CBN showed the impact of CRR deduction policy of the apex bank.

He explained: “A lot of banks are under liquidity pressure following the consistent CRR debit by CBN. The weekly debit by CBN puts banks in a very difficult situation since they don’t know how much they will debit.”

On deposits by DMBs and merchant banks, he said: “banks deposit with CBN depends on factor of demand and supply. When banks have access to enough to liquidty, that is when they take to CBN and when they don’t have enough liquidity, that is when they reduced their deposit.Also notice that there is a correlation between that window and FAAC. When FG releases FAAC, there is a lot of money in circulation and they deposit the excess funds with CBN.”

The Managing Director, Highcap Securities Limited, Mr. David Adnori expressed that growing demands by DBMs and merchant banks responsible for hike in borrowing from CBN to sustain their daily business activites.

He said: “the opening of the nation’s economy this year aided growth in banks’ borrowing from CBN. The demand for banks loans increased tremendously.When demand on bank’s loans increase significantly and banks don’t have depositors’ money to lend, they visit CBN to borrow from the SLF.The deposit by bank’s customers are insufficient to meet loans application by customers- reason why banks and merchant banks to access more funds.”

Analyst at PAC Holdings, Mr. Wole Adeyeye expressed that banks and merchant banks have no other option than to borrow from the CBN to lend to real sector.

In his words: “Since the ease of the lockdown, CBN was working with banks to improve lending to real sector.Banks are actually giving out these funds to meet their daily obligation of lending to real sector. The aim of the CBN and banks is to enable people have access to credit facility. It is indirectly CBN’s giving banks this SLF to the people.

“It is like CBN improving productivity in the nation’s economy.When banks and merchant banks have excess liquidity, they take it to CBN. When they have enough liquidity, they reduced deposit with CBN.”

The central bank in its January 2021 economy report disclosed that DMBs and merchant banks made more deposit than borrowings in the standing facilities window.

The CBN in its report said: “Total request for the SLF and granted from January 1–31, 2021 was N492.50 billion, made up of N68.30 billion direct SLF and N424.20 Intraday Lending Facilities (ILF) converted to overnight repo. Daily average was N35.18 billion in 14 transaction days from January 1–31, 2021 with a total interest of N0.29 billion.

“Total SDF granted, during the review period, was N528.33 billion with a daily average of N26.42 billion in 20 transaction days from January 1-31, 2021. Daily request ranged from N4.70 billion to N42.59 billion. Cost incurred on SDF in the month stood at N0.08 billion.”