Liquidity squeeze: Banks to borrow N45trn from CBN

Deposits with CBN set to decline

By Babajide Komolafe

WITH   persistent scarcity   of funds plaguing the banking industry, prompting   banks to   increasingly rely on the Central Bank of Nigeria (CBN) for liquidity support, banks’ borrowing from the apex bank   is set to hit N45 trillion this year, with interest payment of N36 billion.

The above represents 51 per cent and 64 per cent increase when compared with N29 trillion banks borrowed and N22 billion interests paid in 2016. On the other hand, banks deposit placement with the CBN is expected to drop by 14.3 percent to N15.6 trillion from N18.2 trillion while interest earned by the banks is expected to rise moderately to N5.1 billion from N4.8 billion in 2016.

Indications to the above emerged from the CBN economic report for January and February this year, which showed that banks’ average monthly borrowing from the CBN, through its Standing Lending facility (SLF) jumped by 56 per cent to N3.8 trillion from N2.5 trillion in 2016. Average monthly interest paid on the borrowing also jumped by 66 per cent to N2.98 billion from N1.8 billion in the previous year.

But banks’ average monthly deposit with the apex bank, through the Standing Deposit Facility (SDF) dropped by 14 per cent to N1.3 trillion from N1.5 trillion in 2016, while the average interest paid by the CBN on the deposits etched up to N430 million from N400 million.

Standing Facility window

According to the CBN February Economic report: “The Deposit Money Banks (DMBs) and merchant banks continued to access the Standing Facility window to square up their positions via either borrowing from the CBN or depositing of excess as reserves at the end of each business day. The trend showed more patronage for the Standing Lending Facility (SLF). Applicable rates for the SLF and Standing Deposit Facility (SDF) remained at 16 per cent and 9.00 per cent, respectively.”

The 2016 position: Vanguard analysis revealed that in 2016, banks’ borrowing from the apex rose progressively from the first quarter to the last quarter of the year, while their deposit placement moved in the opposite direction.

In the first quarter, banks borrowed N560.8 billion from the apex bank. The amount borrowed rose by 705 per cent to N4.52 trillion in the second quarter, and further by 151 per cent to N11.36 trillion in the third quarter. In the fourth quarter, it rose further    by 14 per cent to   N13 trillion.

Similarly, the interest paid by banks rose by 843 per cent to N2.64 billion in the second quarter from N280 million in the first quarter. In the third quarter it rose by 233 per cent to N8.78 billion and in the last quarter by 14 per cent to N9.97 billion.

On the other hand, banks’ deposit placement with the CBN dropped by 9 per cent to N6 trillion in the second quarter from N6.6 trillion in the first quarter of 2016. In the third quarter it dropped by 57 per cent to N2.6 trillion. However, it rose by 15 per cent to N2.95 trillion in the fourth quarter.

As a result of the largely unstable money supply situation during the period, interest rates fluctuated and this was reflected in the SDF transactions. The interest received by the banks rose by 63 per cent from N1.08 billion in the first quarter to N1.76 billion in the second quarter. In the third quarter it dropped by 46 per cent to N950 million, but rose by 11 per cent to N1.05 billion in the fourth quarter.

2017 challenges: In the second quarter of 2017, the interbank money market has been bedevilled by constant shortage of funds since the CBN commenced a bullish intervention in the foreign exchange market two months ago to address the depreciation of the naira in the parallel market. As a result, banks’ weekly borrowing from the CBN jumped by 125 per cent to N360 billion in the last week of April from N160 billion in last week of   January, while average weekly deposit with the apex bank dropped by 69 per cent to N39 billion in May from N124 billion during the same period.

Also cost of funds in the interbank money market has been persistently volatile with average short term interest rates oscillating between 100 per cent and 15 per cent on a weekly basis. For example, between May 26 and June 12, interest rates on Collateralised lending and Overnight lending (OBB, O/N) rose by 10,500 basis points (bps) and 11,424bps respectively. Interest rates on OBB closed at 116.67 per cent, while interest rate on O/N closed at 126.67 per cent   on June 12th,   as (foreign exchange) forex intervention during the period mopped up naira liquidity.

Bismarck Rewane explains: Commenting on this development,    Managing Director/Chief Executive of Financial Derivatives Company, Mr. Bismarck Rewane, said that the scarcity of funds   is leading to naira appreciation and decline in prices.

He stated: “Every time you sell dollars to them, you take naira away from them. The banks will rather stay in dollar than stay in naira, so they borrow naira. That is what is happening, they are all short on naira and long on dollars”.

He however noted that the implementation of the 2017 budget will provide some liquidity relief for the system, explaining thus: “First and foremost N350 billion is being disbursed by the Federal Ministry of Finance for capital budget, the short position of the banking system is about N140 billion, so the N350 billion injection will bring that down. When the government starts disbursing funds for recurrent expenditure, then some liquidity will come back into the system.”

He however averred that banks’ increased borrowing may persist due to preference for dollars based on the expectation that naira will soon depreciate.

 Artificial price

On the huge interest paid on borrowings from the apex bank he said: “They don’t mind. They think that the dollar will appreciate. All of them in the long run, they are all betting against the naira. In an environment like this, it is better to be a borrower, because you will pay with cheaper naira later on.

“And I think it is pretty obvious that the naira will depreciate. I think the current exchange rate of N360 per dollar, is artificial price. The price of oil is $46 dollar per barrel, and your reserves are down to $30 billion and going lower, your oil production is at 1.8 million or 1.9 million barrels, there is only one direction that the naira will go in the next three weeks. I am not saying it will crash but it will begin to depreciate. There is no question about that, it is pretty obvious”.

He argued that the system will however correct itself and banks will not have to borrow much from the apex bank and hence pay less interest rate.

“The system will correct itself because at that time the naira will depreciate, there will be more naira available for the government and they will reduce their treasury bill borrowing,” he added.

 

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