Commercial and merchant banks often depend on the central bank bank for short-term liquidity needs to support their lending to the real sector in the event of scarcity of liquidity in the interbank money market.
The CBN lends money to commercial and merchant banks through the Standing Lending Facility (SLF) at interest rate of 100 basis points (bpts) above the 11.5 per cent Monetary Policy Rate (MPR).
The industry had in first half of 2021 faced liquidity crises as commercial and merchant banks aggressively borrowed from the CBN.
An investigation by THISDAY revealed that commercial and merchant banks borrowing from the CBN rose by 126 per cent in 10 months to N11.64 trillion from N5.15trillion in 10 months of 2020.
Analysts attributed the increasing commercial and merchant banks borrowing from the CBN to a liquidity crunch in the system, maintaining that the Friday’s Cash Reserve Deposit (CRR) deduction is forcing an aggressive borrowing.
They noted that the reported N5.15trillion borrowing by commercial and merchant banks from CBN last year was due to COVID-19 lockdown that impacted on business activities and lending to real sector.
Commenting on aggressive borrowing by banks and merchant banks, Head, Financial institutions, Agusto & Co, Mr. Ayokunle Olubunmi, said the hike in bank and merchant banks borrowing from CBN showed the impact of CRR deduction policy of the apex bank.
He explained: “A lot of banks are under liquidity pressure following the consistent CRR debit by CBN. The weekly debit by CBN puts banks in a very difficult situation since they don’t know how much they will debit.”
Speaking on the decline in borrowing from CBN in October, the Vice President, Highcap Securities Limited, Mr. David Adnori attributed the decline in bank and merchant banks borrowing from CBN to excess liquidity and lack of bigger short-term lending obligations in economy activities in October.
Explaining further, he said: “It is an implication that commercial and merchant banks shun borrowing from CBN due to weak business activities in October or they decided not to borrow since they have enough liquidity to meet short-term obligations. It could be there was no opportunity in the economy to finance a project needed for them to access liquidity from the SLF of the CBN.”
Collaborating with Adnori, an Economist, CEO of Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf expressed that decline in commercial and merchant banks borrowing from CBN could be as a result of excess liquidity in the system.
In his words: “Banks were comfortable in terms of liquidity they have in their coffer. It could also be an indication that the nation’s economy is recovering because the more economy recoveries, the healthier the liquidity for the commercial and merchant banks as well.
“All the sectors have opened up and COVID-19 lockdown restriction has been reduced. I think it is healthier liquidity position for the commercial and merchant banks that has played a critical role behind decline in SLF in October.
“As you likely know, as global oil price increases, generally, there will be trajectory in key economy indicators becoming better historically. We have seen correlation when higher oil price and Gross Domestic Product (GDP) growth.
All these positive indicators in the economy have impacted on commercial and banks liquidity position, making them to shun borrowing from CBN as it used to be.
Finance expert at PAC Holdings, Mr. Wole Adeyeye attributed the decline in banks and merchant banks borrowing from CBN to excess liquidity in the banking system.
According to him: “Most banks usually borrow from the SLF to meet short-term withdrawals from their customers. In the past few months, most commercial and merchant banks that bought Treasury Bills (TBs) when yields were rising were reluctant to sell the TBs. Instead, they borrowed from SLF to meet their short-term obligations.
“With the expectation that yields on short-term instruments may likely go down in the coming months, most banks may have sold their part of their TB. This may have improved their liquidity, hence the decline in banks borrowing from the CBN.