Banks Borrow N2.5Trillion in August to Cushion Liquidity Crisis

Banks, discount houses and other financial institutions in the country have reportedly gone on massive borrowing spree, increasing their borrowing from the Central Bank of Nigeria (CBN) by some 210 per cent in one month in order to manage the liquidity crisis.

The massive borrowings are coming on the heels of the imposition of 50 per cent cash reserve requirement (CRR) on public sector deposits by the CBN.

Leadership newspaper quoted data from the CBN which  indicated that deposit money banks (DMBs), merchant banks and discount houses more than tripled the amount borrowed) in August alone to meet their financial obligations.

According to the CBN Economic Report for August 2013, banks increased their borrowing from the CBN Standing Lending Facility (SLF) from N793.08 billion in July to a whopping N2.465 trillion in August alone, representing an increase of 210.8 per cent.

Recall that the CBN commenced implementation of the policy in August following its decision during the Monetary Policy Committee meeting in July. Accordingly, it withdrew N896.43 billion being 50 per cent cash reserve requirement (CRR) on public sector from the banking system earlier that month.

The data also showed that on the average, banks borrowed a whopping N123.29 billion to sustain their operations in August compared with the daily average of N34.48 billion recorded in the preceding month.

Banks opted to borrow from the CBN even though it would disqualify them from accessing foreign exchange from the official foreign exchange market, a pointer to the severity of the liquidity crisis.

In the past, banks have been known to prefer paying the high interbank rate for one day to borrow from other banks rather than borrowing from the CBN at 14.0 per cent and being barred from the official foreign exchange window.

The heavy dependence of the banking sector on monetised oil revenues for its liquidity has been a constant source of worry to the CBN.

Speaking recently on the issue, the CBN governor, Malam Sanusi Lamido Sanusi said the apex bank have been stressing “the need to keep pushing banks into altering their business model to reduce vulnerability.”

The liquidity crisis has forced lending rates to rise. The CBN economic report for August released last week showed that banks’ deposit and lending rates generally trended upwards during the review month. It also revealed that all deposit rates of various maturities, including the average savings rate rose from a range of 2.45 – 7.41 per cent to a range of 2.63 – 7.47 per cent.

“At 6.61 per cent, staff estimate showed that the average term deposit rate rose by 0.45 percentage point above the level at the end of the preceding month. Similarly, the average prime and maximum lending rates rose by 0.41 and 0.84 percentage points to 16.94 and 23.89 per cent in the review month, respectively.

“Similarly, the margin between the average savings deposit and maximum lending rates widened by 0.66 percentage points to 21.26 per cent at the end of August 2013,” the report added.

Also, it showed that at the interbank call segment, the weighted average rate which stood at 10.61 per cent at end-July 2013, increased by 4.52 percentage points to 15.13 per cent at end-August 2013. Similarly, the weighted average rate, at the open-buy-back (OBB) segment, rose by 3.9 percentage points to 14.31 per cent from the level in July 2013.