Strengthening Financial System Liquidity – ThisdayLive

By Obinna Chima

Last week’s harmomisation of both the private and public sector cash reserve requirements (CRR) at 31 per cent by the monetary policy committee (MPC) has been projected to lead to an increase in available deposits in the banking system by approximately N528 billion.

The move, according to some economists and financial market operators would lead to the hat the MPC decision would help inject some liquidity back into the banking system, even as they noted that banks that are more reliant on public sector deposits would be the key beneficiaries of this additional injection of liquidity.

The CRR is a monetary policy tool used to set the minimum deposits commercial banks must hold as reserves rather than lend out. It is usually applied to influence borrowing and interest rates by changing the amount of money in banks’ disposal to make loans.
Previously, while the private sector CRR was at 20 per cent, the CRR on public sector funds was at 75 per cent. The latest MPC decision means that both CRR have been unified at 31 per cent.

But the MPC retained the monetary policy rate (MPR) at 13 per cent with a corridor of +/- 200 basis points around the mid-point and also retained the liquidity ratio at 30 per cent.

The CBN, Governor, Mr. Godwin Emefiele described the 31 per cent harmonised CRR as just a composite rate. Emefiele said the action would enable the central bank achieve the efficacy of the CRR rate regime. He said the committee members considered that the current discriminatory CRR on public and private sector deposits had not only constrained the policy space but could inspire moral hazard by private market participants. Consequently, he noted that while additional tightening measures might not be appropriate now to avoid overheating the economy, the harmonisation of the CRR was imperative in order to curb abuses and improve the efficacy of monetary policy.

However, analysts at CSL Stockbrokers Limited argued that the monetary policy would make very little change to the amount sterilised overall by the central bank.

“It is therefore as close as possible to being neutral with regard to policy, with only N5.1 billion ($25.5million) in additional naira sterilisation (0.1 per cent more than what was sterilised before). “The practical problem for banks is that, having pursued private sector deposits as a result of the policy implemented last year (75% sterilisation of public sector deposits was introduced in January 2014), they have now received an incentive to change tactics and gather public sector deposits (in naira).

“If a bank has 20 per cent public sector deposits (in naira) sterilised at 75 per cent and 80 per cent private sector deposits (in naira) sterilised at 20 per cent, then its overall sterilisation, in naira, is 31 per cent. So, to find beneficiaries, we need to find banks with public sector deposits greater than 20 per cent of total naira deposits,” they argued.

Also, analysts at Afrinvest West Africa Limited noted that by implication, the CBN had unleashed the strings on deposits in the banking system.

“In our view, the expectation that the new CRR may lead to increased real sector lending may not actually be the case in the interim, given the evident risks that pervade the space. Based on management guidance, banks are not willing to increase lending expressively until the new administration settles and policy direction is ascertained.

“On the other hand, the additional liquidity into the system may be channelled to the fixed income market given the current attractive yields. This in turn may help push down yields within the short term. We wish to highlight that the full implementation of the Treasury Single Account (TSA) may also reduce the quantum of public sector deposits in the banking system,” they stated.

To the Head of Research/Chief Economist Africa at Standard Chartered Bank, Razia Khan, the MPC decision suggests a rough 73:27 ratio of private sector deposits to public sector deposits.

“We expect to see the injection of some liquidity back into the banking system. Banks that are more reliant on public sector deposits will be the key beneficiaries of this additional injection of liquidity,” Khan added.

Also, the Chief Executive Officer, Financial Derivatives Limited, Mr. Bismarck Rwane, said the MPC members acknowledged that they had reached the peak of its monetary policy tightening.

Similarly, the Executive Director of Sterling Bank Plc, Abubakar Suleiman, said the process of managing the cash reserves ratio previously was very confusing, adding that a unified rate makes a lot of sense. He described the move as a tactical easing.