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A fortnight after it deducted over N600 billion from deposit money banks (DMBs’) accounts for falling short of the required Cash Reserve Ratio (CRR), the Central Bank of Nigeria (CBN), last Friday, collected another N316.5 billion from lenders with excess cash holdings, as part of measures to soak up liquidity and curb forex speculation, New Telegraph gathered.
According to analysts at Zedcrest Capital, the CRR debit, coupled with the about N300 billion retail intervention funding provision made by most banks and the N233.27 billion funding for Federal Government Bonds, pushed interest rates into double-digit figures, as they surged by over 1,000 per cent to close last Friday at 10 per cent and 10.50 per cent for the Open Buy Back (OBB) and Overnight (OVN) rates, respectively.
Given that the CBN debited banks N349.72 billion early last month for failing to meet CRR targets, it means that between then and last Friday, the regulator has collected a total of N1.3 trillion from the accounts of DMBs with excess cash holdings.
CRR is the minimum amount banks are expected to retain with CBN from customer deposits. It is an important monetary policy tool that the regulator uses to soak up liquidity from the banking system, thereby curbing inflation and ensuring exchange rate stability.
Nigeria’s foreign exchange reserves took a significant hit last year due to the sharp drop in the price of oil (the commodity that accounts for about 90 per cent of the country’s export earnings), as well as the COVID-19 crisis-induced exit of Foreign Portfolio Investment (FPI), thus forcing CBN to take measures to curb dollar demand.
In January last year, the CBN’s Monetary Policy Committee (MPC) increased CRR by 500 basis points from 22.5 per cent to 27.5 per cent, a decision, it said, was aimed at tackling inflation, as well as helping to achieve the objectives of the apex bank’s Loan to Deposit Ratio (LDR) policy.
CBN had, in July 2019, directed lenders to maintain a minimum LDR of 60 per cent effective from September 30, 2019. It subsequently raised the minimum LDR to 65 per cent, which DMBs were expected to comply with by December 31, 2019.
The apex bank said the move was part of measures to encourage lenders to drive credit growth, especially to the real sector of the economy.
Commenting on the policy last year, CBN Governor, Mr. Godwin Emefiele, said: “We give them incentives that when they lend to the small and medium enterprises (SMEs) and private sector, they will be granted certain dispensations to make them happy while failure to comply will result into taking 50 per cent of the un-lent portion of their loans into the CRR.”
Analysts estimate that between January and October last year, CBN sequestered about N6.16 trillion from DMBs with excess cash holdings. In a report released last October, Nova Merchant Bank stated that the CBN’s frequent debiting of the accounts of lenders that fall short of both the LDR policy and CRR obligations, had led to an increase in the cost of funds across the banking system.
It, however, noted that the LDR policy had significantly helped to boost lending to the real sector and also brought down the cost of borrowing.