Commercial banks in Nigeria are increasingly borrowing money from the central bank’s standing lending facility, a study by Nairametrics shows.
The Standing Loan Facility (SLF) is a short-term line of credit available to commercial banks when faced with immediate short-term withdrawals from their customers. Commercial banks can also deposit free cash with the CBN through the Permanent Deposit Facility (SDF).
According to data seen by Nairametrics, commercial banks have steadily recorded net borrowing from the CBN since April of this year, a worrying sign that some banks may struggle to meet their short-term liquidity obligations. Since April 2021, there have been more SLF draws compared to homeless people every day except once.
For example, in May 2021, the average daily net bank withdrawals of the CBN were around 222.8 billion naira compared to 115 billion naira the previous April. To put this into perspective, the banks were net lenders to the central bank with a daily average of N34.4 billion.
Further analysis suggests that some banks may have used SLF to avoid a haircut on fixed income assets.
Typically, during tight liquidity situations, the logical thing to do would have been to liquidate their short-term instruments such as treasury bills in exchange for cash, but this option can lead to inadvertent crystallization of cash. an unwanted loss.
For example, banks that bought T-bills when yields were below 2% earlier in the year will lose money if they decide to sell the same T-bills now that the yields are higher. This is probably why they will rather borrow from the CBN.
Another plausible reason for the increase in borrowing from the CBN could be part of the broader strategy of reducing demand for foreign exchange.
According to Wale Okunrinboye, head of research at Sigma Pension, the CBN has tightened liquidity in order to dampen demand for foreign exchange. It does this through forced CRR debits.
âI think the bottom line is that these borrowings reflect the CBN’s tightening of liquidity as a way to dampen the demand for USD given the levels of foreign exchange reserves. For the context throughout 2020 and the first quarter of 2021, banks were net lenders to CBN, a situation that has reversed since April 2021. This reflects a decline in OMO maturities as the CBN downsized of his OMO book and replaced this sterilization. via CRR debits â, said Okunrinboye.
Why it matters
A net SLF is often an indication of a liquidity tightening in commercial banks, usually due to central bank monetary policy, or a symptom that banks have a lot of non-performing loans that they are unable to recover.
In this case, our research team believes that the expansion of SLFs is due to the monetary tightening of central banks which puts pressure on commercial banks to borrow money.
Over the past two years, apex bank has embarked on an unprecedented monetary compression by relying on its policies of cash reserve requirement and loan-to-deposit ratio to sequester billions from commercial banks on a weekly. We estimate that more than N10 trillion has been debited from commercial bank deposits since 2019.
By debiting banks for not meeting their monetary policy demands, the CBN essentially stifles bank money, especially if the money is not funneled into areas of the sector that can help spur economic growth.
Despite this, bankers who spoke to Nairametrics remain concerned that the increase in drawdowns could go beyond just the central bank‘s monetary policies. Some fear that some banks are facing financial problems related to non-performing loans.
In 2020, regulatory forbearance allowed some banks to defer provisions on loans on which they could have suffered a loss. Despite this, 10 of the listed local commercial banks reported an allowance for loan losses of 253 billion naira in 2020, up from 134.6 billion naira in 2019. Loan losses recorded in the first quarter of 2020 amounted to 38. N 9 billion, up 65% from a year earlier. We believe the increases in losses could be greater for smaller banks.