Following the increase of the Cash Reserve Requirement on public sector deposits from 50 per cent to 75 per cent last week by the Monetary Policy Committee, the Central Bank of Nigeria will on February 4 withdraw an estimated sum of N1tn from the Deposit Money Banks when the policy takes effect.
The CRR is the volume of cash in their possession that the banks have to keep with the central bank and is used to drain out excessive liquidity from the system.
If the central bank decides to increase the CRR, the available amount with the banks reduces.
The latest CBN statistical bulletin showed that as of September 2013, public sector deposits in the banks stood at N4.06tn and accounted for 25.71 per cent of their total deposits.
Of the N4.06tn, about N2.03tn was sterilised by the CBN following the implementation of the 50 per cent CRR.
The latest increase in the CRR to 75 per cent by the MPC last Tuesday may lead to an additional withdrawal of close to N1.01tn on February 4, if the deposit structure in the banks maintains this trend.
According to the CBN data, the banks’ total deposits as of September 2013 stood at N15.795tn; while the public sector accounted for N4.061tn, the private sector deposits stood at N11.734tn.
As of September 2013, the CBN had sterilised about N2.03tn.
When the CBN withdraws the estimated N1.01tn from the banking system on February 4, the total amount sterilised by the central bank will be around N3.046tn if the deposit structure in the banks remains on the same trend.
The CRR increase, according to the MPC, is to strengthen the naira and reaffirm the CBN’s commitment to price and exchange rate stability.
The CBN had last July expressed concern over the excess liquidity in the balance sheets of the DMBs and subsequently imposed 50 per cent CRR on all government deposits with the banks from 12 per cent previously.
The decision, which came as a major shock to the banks, made some of the lenders to record marginal drop in their third quarter profits.
For example, United Bank for Africa Plc, Access Bank Plc, Fidelity Bank Plc, Skye Bank Plc, Union Bank Plc and Unity Bank Plc recorded lower nine-month profits after tax, compared to the third quarter of the previous year.
Analysts and some bank executives noted that the 50 per cent CRR would also affect negatively the fourth quarter results of some of the banks due to be released next month.
Some analysts had predicted that the latest increase of the CRR to 75 per cent was likely to lead to the sterilisation of additional N600bn to N800bn.
Financial and economic analysts have said this year, which is the penultimate year to the 2015 elections, will be very difficult for the monetary policy as patronage politics will lead to excess liquidity in the system.
The redemption of N1tn Asset Management Corporation of Nigeria’s bonds to institutional investors may have also led to increased liquidity in the system, analysts said.
Financial Derivatives Company Limited, a Lagos-based economic and financial advisory firm, said the MPC might also need to increase the CRR on private sector deposits to curb excess liquidity.