Deposit money banks in the country borrowed a total of N2.25 trillion from the Central Bank of Nigeria (CBN)’s Standing Lending Facility (SLF) window in the first five months of this year, latest data released by the apex bank shows.
DMBs borrow from CBN through its SLF window — at interest rate of 100 basis points (bpts) above the Monetary Policy Rate (MPR) — to carry out their business activities and meet urgent liquidity needs.
They, however, use the apex bank’s Standing Deposit Facility (SDF) window for deposit placement.
According to the CBN’s Economic Report for May 2022, released last week, lenders’ borrowing from the apex bank’s SLF window increased by 20.4 per cent to N737.05 billion from N612.43 billion in the preceding month, while total transactions at the SDF window rose slightly by 0.2 per cent to N321.23billion in May from N320.55 billion in April 2022.
With the CBN’s Economic Report for Q1’22 and Economic Report for April 2022 stating that banks borrowed a total of N902.17 billion from the SLF window between January and March and N612.43 billion in April, it means that transactions at the window from January to May 2022, amounted to N2.25 trillion.
New Telegraph’s analysis of the apex bank’s data indicates that although there was improved liquidity in the banking system in May, compared with the preceding month that saw lenders grappling with a liquidity squeeze occasioned by regulator’s auction of foreign exchange swaps and its use of discretionary Cash Reserve Ratio (CRR) debits, the DMBs still resorted to borrowing from CBN through its SLF window.
For instance, the Economic Report for May 2022 stated that “average banking system liquidity increased by 26.6 per cent to N197.84 billion relative to N156.30 billion in the preceding month. The major drivers of liquidity in the review period were fiscal injections (N813.86 billion), repos (N870.32 billion), and OMO bills repayment (N643.01 billion).
The maturities of OMO bills and repos were 238.57 per cent and 83.29 per cent higher than the preceding month’s level of N189.92 billion and N474.83 billion, respectively. “Following the liquidity trend in the period, the bank conducted three OMO auctions in May.
The sums of N100.00 billion, N645.51 billion and N100.00 billion were offered, subscribed and allotted, respectively. Demand for the in- struments remained strong, as reflected in the bid-cover ratio of 6.46. In the period, N643.01 billion of OMO bills matured, while N100.00 billion were allotted, thus, yielding a net injection of N543.01 billion.”
The report further said: “Despite the improved liquidity, the total standing lending facility increased considerably by 20.4 per cent to N737.05 billion relative to N612.43 billion at end-April 2022. Similarly, relative to the preceding month, the total standing deposit facility increased slightly by 0.2 per cent to N321.23 billion from N320.55 billion.
“At the open buyback (OBB) segment, as the rate increased by 190 basis points to 9.39 per cent, the value of transactions declined to N213.75 billion from N228.42 billion in the preceding month.
The average daily number of deals in the OBB segment fell to 64 from 75 deals in the preceding period.” Analysts note that borrowing from CBN through the SLF window is a better alternative for DMBs, as the SLF rate is relatively cheaper compared to interbank interest rates and also because the apex bank continues to make use of the discretionary CRR debits.
New Telegraph reports that as part of its efforts to control inflationary pressure, the CBN’s Monetary Policy Committee (MPC), in 2020, increased the CRR by five per cent, from 22.5 percent to 27.5 per cent. CRR is a percentage of a bank’s total deposit, which it must maintain with the apex bank at all times.
In a recent report, analysts at Coronation Merchant Bank attributed the relatively low demand recorded at the last monthly auction of FGN bonds, conducted by the Debt Management Office (DMO) to tight system liquidity and negative real interest rates occasioned by the high inflation rate.
The analysts said that the tight liquidity was partly the result of CBN’s continuous use of discretionary CRR debits. As they put it, “the relatively low demand at the auction mirrors tight system liquidity.
We note that market liquidity stood at a deficit of -N3.6 billion on Friday (12 August ‘22). Overnight and repo rates closed within a range of 12 – 15 per cent. The tightness in system liquidity can be partly attributed to CBN’s continuous use of the discretionary Cash Reserve Ratio (CRR) debits.”