The Central Bank of Nigeria (CBN) in 2021 debited 10 banks a whooping N7.02 trillion over failure to meet the 27.5 per cent Cash Reserve Requirement (CRR) threshold.
According to audited financial statements of these banks, the apex bank had debited them a sum of N6.71trillion in 2020 for not meeting its monetary requirement.
The CRR is the minimum amount banks and merchant banks are expected to retain with the CBN from customer deposits and it carries no interest and is not available for use by the banks in their day-to-day operations.
In early 2020, the apex bank’s Monetary Policy Committee (MPC) increased CRR by five per cent from 22.5 per cent to 27.5 per cent over its intention to address monetary-induced inflation whilst retaining its 65 per cent Loan Deposit Ratio (LDR) policy.
The CBN by regulation forces banks to retain up to 27.5 per cent of their deposits in CRR requirement, meaning that the deposits are not accessed by the banks for loans and advances.
The policy, which started in 2019 has drawn criticisms from most of the banks and shareholders who have cited a drop in their profitas a major consequence.
The banks include: Access Bank Plc, Guaranty Trust Bank (GTBank), United Bank for Africa (UBA) Plc, FCMB group and Sterling Bank Plc.
The others are; Union Bank of Nigeria Plc, Stanbic IBTC Holdings Plc, Fidelity Bank Plc, and Zenith Bank Plc.
Extracts from 2021 audited accounts revealed that, Access Bank, followed by Zenith bank suffered the highest debits in 2021, among other 10 banks, while Sterling bank suffered the lowest debit.
Access bank and Zenith bank are the top two banks in terms of customer deposits.
Access Bank reported 12 per cent increase in restricted deposits with CBN in 2021 to N1.47trillion from N1.31trillion reported in 2020, while Zenith Bank reported a decline of 6.05 per cent to N1.25trillion CRR deposit with CBN as against N1.33trillion in 2020.
GTBank, the banking subsidiary of Guaranty Trust Holding company reported N953 billion CRR debit with CBN, a decline of 5.5 per cent from N1.01trillion reported in 2020.
The Group in its 2021 audited results explained that, “Restricted deposits with central banks comprises of restricted deposits with the central bank not available for use in the Group’s day-to-day operations.
“The GTBank Nigeria had restricted balances of N953,040,540,000 with the CBN as at 31 December 2021 (December 2020: N1,008,748,051,000). This balance is CBN cash reserve requirement. The cash reserve ratio represents a mandatory total Naira deposit which should be held with the Central Bank of Nigeria as a regulatory requirement.”
The group in its 2021 investors/analysts’ presentation noted that CRR closed at N952 3 billion in 2021 from N1 009 trillion in 2020, resulting in effective CRR ratio of 37 6per cent from 44 33per cent in 2020 (with Special Bills, CRR closed 59 7 per cent).
However, UBA’s suffered a debit of N915.15billion in 2021, a decline of 13 per cent from N1.05trillion reported in 2020.
Union Bank of Nigeria and Stanbic IBTC reported 28per cent and 22 per cent increase in deposits kept with the central bank as CRR in 2021, respectively.
The effect can be seen in both banks’ profits reported in the year under review.
From recording a mandatory deposit of N454.8billion with CBN in 2021 from N356.45billion in 2020, Union Bank of Nigeria reported 20 per cent decline in profit before tax to N20.69 billion in 2021 from N25.97 billion, as Stanbic IBTC reported 30.3per cent drop in profit before tax to N66 billion in 2021 from N94.72 billion when its CRR closed 2021 at N423.18billion in 2021 from N348.17billion reported in 2020.
Other banks are, Fidelity Bank with N686.1billion CRR debit from CBN in 2021 as against N540.13billion in 2021; Wema Bank grew its CRR debit to N313.8billion in 2021 from N246.97billion in 2020; FCMB Group closed 2021 with N309.63billion CRR debit with CBN from N289.14billion in 2020 and Sterling Bank reported N243.87billion mandatory reserve deposits with CBN from N228.79billion in 2020.
Analysts at GTCO in its report titled, “Nigeria Macro-economic outlook for 2022,” explained that the reason for the tight system liquidity is the CBN’s discretionary CRR debits which posed a huge challenge to credit growth for most banks.
According to them, “A rough estimate of the industry’s effective CRR position suggests that about 50per cent of total naira deposits are sterilised with the CBN as CRR and Special Bills.
“Going into 2022, the general build-up to the 2023 Elections will very likely result in a system awash with liquidity. We believe that the apex bank will tighten the system from the second half of the year just as political campaigns start, to mop-up excess liquidity from the system.
“Although it is unlikely that the CBN will slow down on its discretional CRR debits, we expect more banks to approach the apex bank for the release of a portion of their ‘excess’ CRR to assist them in funding their transactions, payment of regulatory levies/fees, etc.”
The Vice President, Highcap Securities Limited, Mr. David Adnori said the apex bank is using CRR to control inflation, stressing that the introduction of CRR is a drastic monetary policy targeted at controlling money supply in the banking system.
According to him: “If CBN fails to maintain its CRR policy, so much money will flow into the market and further deprecates naira. Generally, the policy has not favoured banks because the fund is not yielding any interest and of no benefit to the productive sector.
“These are funds banks lend to the real sector to drive business activities, finance working capital of productive sector and boost GDP but the CBN is holding it down.
“It is not a good development for the nation’s economy in general. However, CBN has its reasons and releasing these funds, it might result in hyperinflation, which can damage the nation’s economy. It is like a double edge situation- if you don’t do it, the economy is damaged and if you do it, the economy also struggles.”
He noted that the only way CBN can cut CRR is when inflation dropped to a single-digit rate.
The CBN Governor, Mr. Godwin Emefiele had at the end of 2020 MPC noted that: “the committee is confident that increasing the CRR at this time is fortuitous as it will help address monetary-induced inflation whilst retaining the benefits from the Bank’s LDR policy, which has been successful in significantly increasing credit to the private sector as well as pushing market interest rates downwards.
“The Committee further encouraged the Management of the banks to be more vigorous in its drive to improve access to credit through its pursuit of the Loan-to-deposit ratio policy as doing this would help, not only in creating job opportunities but also help in boosting output growth and in moderating prices.”