Data shows new uptick in banks’ short-term deposits with CBN

Commercial banks have been actively unpacking excess liquidity through the standard deposit facility (SDF) window, financial data obtained at the weekend have indicated.

Data gleaned from the Central Bank of Nigeria (CBN) at the weekend revealed the usual uptick in commercial banks’ lending to the regulator through the SDF window since the beginning of the month with the next balance hitting N201.34 billion.

With the standard lending facility (SLF) estimated at N27.42 billion, the amount unpacked by the financial institution is 89.2 per cent of the total value involved in the short-term lending/borrowing between them and the regulator in the month so far.

SDF and SLF are twin-prudential tools the banks leverage to regulate short-term liquidity positions. When banks face liquidity pressure, perhaps as a result of an increase in credit demand, they access SLF to meet their needs.

But when they are swimming in liquidity, they resort to SDF to unpack the excess. Successive CBN governors have incentivised banks to use SLF to fund the country’s economy out of the doldrums.

The financial data sets point to consistent growth in SDF since the beginning of the year – a sort of reversal in the usual trend. Last month, the banks lent a total of N641.19 billion but borrowed N453.7 billion.

The value of SDF activities was about 17 percentage points higher than that of SLF. Of the N1.115 trillion exchanged through the window in January, SDF was N586.7 billion or 52.6 per cent.

Subject to prevailing conditions and terms, banks lend to CBN at a monetary policy rate (MPR) of less than 700 basis points (bps) but borrow at MPR plus 100 basis points.

While the sudden rise in SDF suggests a healthy and liquid banking sector, it also points to falling credit penetration, with diverse possibilities in-between.

Except the economy is already saturated with funding, which is not the case in Nigeria, rising SDF could be a public vice.

Faced with high political and economic uncertainty, it is expected that banks would factor in risks in their loan underwriting. High energy costs, cash scarcity and election conflict, experts have warned, would increase the country’s risk profile.

With the maximum lending rate heading to 30 per cent, the uptrend in SDF reveals the premium banks place on the safety of depositors’ funds. The banks had grappled with the non-performing loan (NPL) crisis for a long time before the recent stability.

For the first time in over 10 years, the ratio dropped below the five per cent threshold in 2021. But by the end of last year’s first quarter, it overshot the benchmark by 0.3 percentage points.

The Guardian could not confirm whether the growing SDF is coming only from rising liquidity or whether credit-shy banks are also shaving off the credits. February credit data are not available; hence it is difficult to assess the volume of fresh loans the banks have credited since the beginning of cash scarcity.

Yet, the speed of net domestic credit remains modest as at the end of last year. In December, for instance, the figure increased by 3.5 per cent month-on-month to N66.46 trillion – the highest ever recorded. Last year, the figure added 18 trillion or 37 per cent.

The banks may be trading off interest incomes for safety funds, which they make up for from other sources such as transaction charges. According to Moody’s, Nigerian banks are least dependent on interest income among African largest banking industries, which include South Africa, Egypt, Kenya and Morocco.

In 2021, Nigerian banks’ net interest income as a ratio of total revenue source was 59 per cent, while that of Egyptian banks was 80 per cent. Moroccan and Kenyan banks’ net interest to total revenue ratio was 70 per cent just as South African banks averaged 62 per cent.

Experts have argued that most banks shy away from the hard work of credit creation owing to cheap incomes that come from government instruments and transaction charges. In 2021 alone, nine banks made N554.23 billion from fees and commissions alone.

Sadly for the operators, there seems to be a paradigm shift in consumers’ preferences. The Guardian reported that there is a massive adoption of virtual banking services.

Already, there are fears that conventional banks could lose a chunk of their non-interest revenue to the rising competition, an assumption waiting to be confirmed or disproved with the Q1 ’23 financial reports.