Following improved business activity in the country, commercial and investment bank borrowing from the Central Bank of Nigeria (CBN) fell 33.2 percent to N505.3 billion in October from 756.37 billion naira in September 2021.
Commercial and investment banks often depend on the central bank for short-term liquidity needs to support their lending to the real sector in the event of a liquidity shortage in the interbank money market.
The CBN lends money to commercial and investment banks through the Standing Loan Facility (SLF) at an interest rate of 100 basis points (bpt) above the monetary policy rate (TPM) ) by 11.5 percent.
The industry had faced liquidity crises in the first half of 2021 as commercial and investment banks aggressively borrowed from CBN.
A survey by our correspondent found that commercial and investment bank borrowing from the CBN increased 126% in 10 months to 11.64 trillion naira, from 5.15 trillion naira in 10 months of 2020.
Analysts attributed the increase in commercial and investment bank borrowing to the CBN to a shortage of liquidity in the system, saying Friday’s cash reserve deposit (CRR) deduction is forcing aggressive borrowing.
They noted that the 5.15 trillion naira in loans declared by commercial and investment banks to the CBN last year was due to the COVID-19 lockdown which impacted business activities and businesses. loans to the real sector.
Commenting on aggressive borrowing by banks and merchant banks, Agusto & Co’s head of financial institutions, Mr. Ayokunle Olubunmi, said that the rise in banks and merchant banks borrowing from CBN showed the impact of the umbrella bank’s CRR deduction policy.
He explained, “Many banks are under liquidity pressure from the constant flow of CRR by CBN. The weekly CBN debit puts the banks in a very difficult situation because they do not know how much they are going to debit.
Speaking on the decline in borrowing from CBN in October, Highcap Securities Limited Vice Chairman David Adnori attributed the decline in bank and merchant bank borrowing to the CBN to the excess of liquidity and lack of larger short-term loan obligations in economic activities in October.
Explaining further, he said: “This is an implication that commercial and investment banks are avoiding borrowing from CBN due to weak business activity in October or that they have decided not to borrow because they have sufficient liquidity to meet their short-term obligations. There may be no opportunity in the economy to fund a project they need to access CBN SLF cash.
Working with Adnori, economist, CEO of the Center for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf said the decline in commercial and investment bank borrowing from the CBN could be the result of a excess liquidity in the system.
In his words: “The banks were comfortable in terms of the liquidity they have in their vaults. It could also indicate that the country’s economy is recovering, as the more the economy recovers, the healthier the liquidity of commercial and investment banks.
“All sectors have opened and the COVID-19 lockdown restriction has been reduced. I think it was the healthier liquidity position for commercial and investment banks that played a critical role in the decline of the SLF in October.
“As you probably know, as global oil prices rise, in general, the trajectory of key economic indicators will improve historically. We have seen a correlation when the price of oil increases and the growth of gross domestic product (GDP).
All of these positive economic indicators have had an impact on the commercial and banking liquidity position, forcing them to avoid borrowing from the CBN as was the case before.
Financial expert at PAC Holdings, Mr. Wole Adeyeye attributed the decline in bank and investment bank borrowing to the CBN to excess liquidity in the banking system.
According to him: “Most banks usually borrow from SLF to meet short-term withdrawals from their customers. In recent months, most commercial and investment banks that bought Treasury Bills (TBs) when yields rose were reluctant to sell TBs. Instead, they borrowed from SLF to meet their short-term obligations.
“Pending a likely drop in yields on short-term instruments in the coming months, most banks may have sold their share of their TB. This may have improved their liquidity, hence the decline in bank loans from the CBN.