The Central Bank of Nigeria (CBN) withdrew N550 billion from commercial banks for failing to achieve lending targets. The weak economic conditions have limited deposit money banks’ lending appetite, although the sector’s net interest margin remains elevated.
According to analysts, the top bank’s hawkish stance has raised borrowing rates while also increasing the possibility of default. As a result, the rise in interest rates has left banks in a difficult position, with analysts predicting a large default risk.
The Central Bank of Nigeria (CBN) is discontinuing daily CRR debits and will implement an improved Cash Reserve Requirement (CRR) mechanism, according to a letter to all banks titled Cash Reserve Requirement Framework Implementation Guidelines dated February 2, 2024.
The segment of deposits subject to sterilization, according to CBN is determined the extant cash reserve ratio of 32.5% to increases in the banks’ weekly average adjusted deposits. The debit also considered CRR levy of 50% of individual banks’ lending shortfall.
In an interview sessions with MarketForces Africa, analysts said elevated yields on fixed interest securities asset are impediment to lending business.
“If investment in government securities are offering banks as much as 25% without hassle, and other margin dilutive development, why would a bank risk depositors’ funds in lending business”?
Borrowing rates from deposit money banks increase after the Central Bank of Nigeria’s monetary policy committee hiked benchmark interest rate successively until it reached 26.75% in an effort to fight inflation.
Nigeria’s inflation condition has become worrisome, climbing to multi-year high due to government policies, global economic condition and unintended consequence of economic reforms.
The private sector has not been doing well enough over interest rate tightening and exchange rate fluctuation. The consumption side of the economy has been tempered due to households reduced purchasing power.
Analysts said though banks net margin on loans has been boosted, there is another downside, which is often the borrowers’ ability to repay loans. The pressure on the borrower increases as exiting loans are priced higher, forcing companies to pay more on old loans due to the applied variable rate in line with developments in market dynamics.
