There is anxiety within the money market following the sterilisation of 50 percent of public sector deposits in banks by the Central Bank of Nigeria (CBN), which some bank chief executives claim has resulted in a sharp rise in interest rates. But Coordinating Minister of the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, urged banks to relook their cost structure and interest rate spread. THISDAY checks over the weekend revealed that the rate of interest charged on short- term loans by banks climbed to an average of 21 per cent by last Wednesday as the CBN enforced its monetary policy decision to raise the Cash Reserve Requirement (CRR) for public sector funds to 50 per cent. The new monetary policy mandates banks to keep 50 per cent of public sector deposits, which comprise deposits of all tiers of government as well as ministries, departments, agencies and companies in their coffers at the CBN and not lent out. CBN intends to use the move to drain excess liquidity with banks, which had been put at N1.3 trillion. But some bank chief executives who spoke with THISDAY expressed concern that the policy could have adverse effects on the banking industry as well as a spiral effect on the economy. Group Managing Director/Chief Executive Officer, Zenith Bank Plc, Mr. Godwin Emefiele, said: “To me, in terms of impact of the introduction of the 50 per cent CRR through the withdrawal of statutory government funds from the banking industry, there are basically two major risks that this poses for the banking industry. One of them is liquidity risk and the other is interest rate risk. “For banks that took public sector funds and granted them as loans, they will face great liquidity and interest rate risks and, of course, they will not be able to call back the loans that they had granted to their customers. For banks that collected those deposits and placed them in treasury bills and other government instruments, they will face only interest rates risk, which is left there in terms of impact on them”. Continuing, the Zenith Bank CEO said: “But in terms of the effect on lending rates and borrowing, what you will see effectively is that the withdrawal of these funds from the banks will lead to private sector depositors asking for higher rate of returns on their deposit and as this happens, naturally what you will see is that borrowers who are taking monies from banks will have to pay more for borrowing from banks. “What you will also see effectively is that because interest rates on loans will go up, you will find that this will adversely impact on productivity because productivity level will drop if you have companies that are unable to borrow at reasonable rates. It will affect the productivity of industries and you will have price level going up.” Responding to a question on his advice to the CBN, Emefiele pointed out that considering the federal government’s desire for banks to lend to borrowers at low interest rates, what was required was to allow the banks to maintain the public sector deposits as it used to be, “but insist that the banks channel the funds into productive sectors of the economy. If banks do this, what you will find is that productivity will increase, price levels would be low and employment will be created.” He added: “The general well being of the citizens would be improved upon and government can, therefore, based on this, beat its chest and say it has created employment and has achieved a relative level of price stability. This approach, in my view, would adversely affect productivity and domestic price levels. But if you ask me if the CBN has done the right thing, I will say, yes.” Group Managing Director/CEO of Skye Bank Plc, Mr. Kehinde Durosinmi-Etti, explained: “The liquidity of banks today is very thin and when I say very thin, I mean banks maintain high liquidity ratio but are subjected to measures that can impact negatively and quickly on them. So it is like you have to hold a high level of cash within your coffers. When you have a large amount of cash within your coffers, you prepare for such policies that can impact on your liquidity sharply. “So, they say there is excess liquidity, but I do not think so from my own assessment and it depends on what you are looking at really. The central bank wants us to keep a minimum liquidity ratio of 30 per cent, so you add a factor that makes you feel fairly safe above that. If you maintain a liquidity ratio that is close to 30 per cent and they come out with this kind of measure, it impacts on you." Tags: News, Nigeria, Featured, Interest Rates
Posted on: Sun, 11 Aug 2013 21:27:56 +0000