N300bn Excess Liquidity in Banks Unsettles CBN

The Central Bank of Nigeria’s Monetary Policy Committee (MPC) friday expressed concern that banks are currently holding large excess reserves averaging over N300 billion. CBN Governor, Mr. Godwin Emefiele who addressed the media after the 240th MPC meeting in Abuja, expressed dissatisfaction about the development.

However, all the key monetary policy tools were left unchanged. Specifically, while the Monetary Policy Rate (MPR) was left at 12 per cent with a corridor of +/- 200 basis points around the midpoint; the public sector Cash Reserve Requirement (CRR) at 75 per cent; CRR on private sector was also left at 15 per cent.

Emefiele pointed out that there are ample opportunities for productive and profitable lending to the real sector of the economy by banks, instead of the financial institutions to be placing such funds in government securities.

According to the CBN governor, the concern in the system was further strengthened by the reality of injecting an additional N866 billion into the system through the redemption of maturing Asset Management Corporation of Nigeria (AMCON) bonds in October.

He also noted that given the apathy to lending, banks may be inclined more to placing these new funds in the Standing Deposit Facility or use it to increase pressure on the exchange rate.

The committee also advised the central bank to explore ways of encouraging banks to lend such excess reserves to the real sector.

Emefiele added: “In the light of the foregoing and consideration of other key risk factors, the Committee was of the view that the direction for policy in the short- to medium term would be either to retain the current tight stance of monetary policy or further tighten monetary policy.

“In view of these developments, the Committee was split between retaining the current stance of monetary policy and further tightening. Consequently, six members voted to retain the current stance of monetary policy. Five members voted to increase private sector CRR, while one member voted to increase public sector CRR. In addition, one member voted for an asymmetric corridor around the MPR.”

Responding to questions on when the central bank would likely relax monetary policy, the CBN governor said: “The decision to bring down interest rates depends on the size of liquidity and all economic parameters in the Nigerian economy particularly as we approach the elections.

“You heard me talk about the high level of liquidity in the system. The MPC thinks that although the natural direction is to tighten, but we still felt that if we cannot reduce interest rates, we should just leave it stable rather than taking it up.
“Primarily because we believe that raising interest rate will hurt our people and some of the companies would complain that high interest rates would hurt their businesses and of that reason we decided to leave interest rates stable.”

Continuing, he said: “Ordinarily, because of the size of liquidity we see in the system today, what we should have done actually is to tighten further but we would continue to monitor the liquidity system and I can assure you that what we said in our agenda that interest rate would gradually come down is an objective that we would eventually pursue. But we would continue to monitor what is happening in the Nigerian economy and all the parameters to determine whether or not we've attained the right time to move in that direction.”

He however allayed fears that that banks’ exposure to the oil and gas and power sectors would crystallise into bad debts, saying that the committee reviewed the exposures to the oil and gas power sectors and found that those exposures were going primarily to companies that acquired oil blocks in the upstream sector.

“We think that giving the Nigerian banks the opportunity to begin to lend monies to companies in the upstream sector of the economy is a good one and we've not seen any risks of failure to relay those loans particular because these companies generate foreign currency revenue and we believe they'll be able to meet their obligation.

“Exposure to power sector is another aspect that people are a little bit worried about. But let me say that there's truly no need for anybody to worry about the exposure to power sector and that is the reason why the CBN in collaboration with Nigerian banks are trying their best – working with the ministry of petroleum resources and the ministry of power as well as the Nigerian Electricity Regulatory Commission – working on how to see that the legacy debts in the power sector would eventually get paid,” he said.

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