Increase in bank idle funds despite tightening credit

Information acquired from official papers over the weekend indicates that since the start of the year, the flow of short-term loans from deposit money banks (DMBs) to their regulator has increased in an unexpected way.

The previous tendency, which has reversed, reveals that many banks have a surplus of idle cash, much of which may have resulted from the recent rise in deposits since the start of the naira reform program.

The Central Bank of Nigeria’s (CBN) official statistics indicate that commercial banks have disbursed a total of N755.05 billion through the standard lending facility (SLF) since the year’s inception until Friday.

The amount is N226.7 billion, or 43%, more than the total sum that the apex bank lent to banks within the same time period.

The banks have lent N528.3 billion from the window’s lending component so far this year (YTD) (standard lending facility).

SDF accounts for 58.8% of the total standard discount facility valued at N1.28 trillion executed this year, reversing prior years’ data.

A standard lending facility (SLF) took 77.5 percent of the transaction value last year, or N11.15 trillion, leaving only N3.24 trillion for SDF.

Early in January, the SDF rise began, but it reached its pinnacle on Friday when the total lending exceeded N112 billion, or 14.8% of the total SDF transacted in the 40days.

An additional study of the data set showed that, on average this year, banks lent the CBN a total of 32.83 billion dollars every day while they collectively received roughly N23 billion.

For the first time in recent memory, banks are lending to the CBN on a net short-term basis (at N226.7 billion).

Banks lend to the CBN at a monetary policy rate (MPR) of less than 700 basis points (bps), subject to the terms and conditions in effect, but borrow at the MPR + 100 bps.

This increase in SDF points to a robust and liquid banking industry, but it also indicates slipping credit penetration, with a range of possibilities in between.

Rising SDF may be a public vice unless the economy is already overfinanced, which is not the situation in Nigeria.

It is anticipated that banks will start to price risks as a result of the growing political and economic unpredictability. Experts have cautioned that general elections, financial shortages, and fuel shortages will raise the country’s risk profile.

The upward trend in SDF illustrates the value banks regard on the security of their customers’ money, with the maximum loan rate reaching 29.13% in December. Before the recent stability, the banks were struggling with the non-performing loan (NPL) issue.

In 2021, the ratio fell under the 5% cutoff for the first time in more than ten years. But by the end of the first quarter of last year, it had 0.3 percentage points more than the benchmark.

We were unable to determine whether the expanding SDF is due solely to increased liquidity or whether credit-conscious institutions are also reducing loans. Since there are no credit records for the previous two months, it is challenging to determine how many new loans the banks are making.

However, the rate of net domestic credit is still only slightly faster than it was at the end of 2017. For instance, the amount climbed by 3.5% month over month in December to N66.46 trillion, which is the biggest amount ever noted. The increase was 18 trillion, or 37%, in the previous year.

The banks might forgo interest incomes in the name of safety. The banks might be able to make up for their lost income through other means, such transaction fees.

Among the continent’s largest banking sectors, which also include South Africa, Egypt, Kenya, and Morocco, Moody’s claims that Nigerian banks are the least reliant on interest income.

Net interest income for Nigerian banks as a percentage of total revenue in 2021 was 59%, compared to 80% for Egyptian banks. The ratio of net interest to total income for Moroccan and Kenyan banks was 70%, whereas it was 62% on average for South African banks.

According to experts, because government instruments and transaction fees provide banks with cheap money, they tend to avoid the difficult process of creating credit. Nine banks collectively generated N554.23 billion in fees and commissions in 2021.

From November to January, deposits increased as millions of Nigerians turned in their old banknote-based assets to banks in exchange for deposits. Bank liquidity would have expanded as a result. Since the start of the exercise, N2.1 trillion has been swept up, according to the CBN. Only N500 billion was believed to have been in the banking system prior to the policy’s implementation.

Godwin Emefiele, the governor of the Central Bank of Nigeria, claimed that the economy need the cash held in reserve to boost output. However, its statistics might have shown that a sizable portion of the mop-liquidity up’s isn’t making its way into the economy in the form of credit.

The banks use SDF and SLF as twin-prudential tools to control short-term liquidity positions.

Banks use SLF to meet their demands when they are under liquidity pressure, such as a result of an increase in loan demand.

But when they have an abundance of money, they turn to SDF to unload it. Banks have been encouraged by successive CBN governors to employ SLF to inject funding into the struggling national economy.

Subscribe to our newsletter for latest news and updates. You can disable anytime.