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Wednesday, November 04, 2009
CBN to boost liquidity, cuts interest on deposits
- Revisits setting up of Asset Management firm
- Checks cash movements by politicians
From Enitar Ugwu (Lagos) and Mathias Okwe (Abuja)
TO engender financial liquidity in the system and fast-track investments, especially in the real sector, the Central Bank of Nigeria (CBN) has cut down by 400 basis points earnings on fixed deposits in the financial system in Nigeria. The deposit rate cut is however below the apex bank's Monetary Policy Rate (MPR) which was left at six per cent.
Meanwhile, in a renewed move aimed at ensuring stability in the banking sector, the CBN is to set up Asset Management Company (AMC) of Nigeria.
The reduction is one of the high points of the apex bank's Monetary Policy Committee (MPC) meeting which held in Abuja yesterday. The MPC is the CBN's think-tank which prescribes the monetary policy framework or roadmap for the country.
The CBN Governor, Mr. Sanusi Lamido Sanusi who is the Chairman of the MPC, yesterday told journalists at the end of the meeting that the decision was reached after the committee discovered that banks now preferred to leave their funds with the apex bank to earn about two per cent interest, instead of lending it out prudently for higher investments and higher returns.
In the month of October, for instance, he said it was discovered that the excess reserves of banks with the CBN were high with the average daily excess reserves exceeding the average in any of the preceding four months of the year.
Some banks, he further revealed, took recourse to standing deposit facilities with sharp increase since the middle of the month, adding that no bank accessed the standing lending facilities during the same period.
Sanusi said though the development could be considered a structural phenomenon in view of the mid-month Federation Accounts Allocations, but declared that the sharp recourse to standing deposit facility and non-use of the standing lending facility in the later half of the month seem to suggest that there is a scope to reset the rates on standing facilities. This, he said, was to eliminate perverse incentives and encourage banks to enlarge their asset portfolios in a prudent manner.
Accordingly, the MPC, he said, adopted the following decisions:
- The MPR will remain unchanged at six per cent, but an asymmetric corridor of interest rates around the MPR is introduced. The rate on the standing lending facility will remain at 200 basis points above the MPR, while the rate on the standing deposit facility will be 400 basis points below the MPR;
- there will be quantitative easing to bridge the gap currently estimated at about N500 billion between the levels of the current monetary aggregates and the benchmark levels for 2009. The modalities for quantitative easing include investments in bonds to be issued by AMC. The setting up of AMC, however, is subject to the approval of the National Assembly;
- other modalities include the redemption of promissory notes issued by the Federal Ministry of Finance as well as by the CBN in connection with the retirement of debt and liabilities arising from purchase and assumption of failed banks;
- purchase of loans by banks under the AMC will be based on terms aimed at strengthening the balance sheets with a focus on asset quality, improving liquidity and capital adequacy as well as reducing debt overhang relating to the stock market in order to stimulate activity in the capital market;
- with effect from November 16, 2009, the temporary ban placed by the CBN on the use of Bankers' Acceptances (BAs) and Commercial Papers (CPs) will be lifted. Guidelines will be issued by the CBN prior to that date; and
- in view of the fact that the audit of banks has been concluded and adequate provisions have been made for non-performing loans and to stimulate credit growth and strengthen banks' balance sheets, the one per cent general provision on performing loans contained in the existing prudential guidelines is hereby waived for the year 2009 as a countercyclical measure. New prudential guidelines will be issued before the end of first quarter in 2010.
Sanusi insisted that the totality of the new measures was aimed at improving system liquidity and financial robustness in the country.
He used the occasion to debunk allegations that he had directed the management appointed in "troubled banks " not to relate with their boards, describing the insinuation as a figment of the imagination of the peddlers.
Notwithstanding the low monetary growth, money market rates reflected market realities. With the inter-bank money market guarantees in place and the measures to strengthen the banking sector, confidence in the money market has improved. This reflected in the downward movement in the daily unsecured call rates. The average call rate for September 2009 was 9.98 per cent compared with 10.38 per cent in August and 17.64 per cent in July. The secured Open Buy-Back (OBB) rate was 6.71 per cent for September 2009, a shade higher than the 6.67 per cent in August but lower than the 7.47 per cent in July. The spread representing the counterpart credit risk thus narrowed to 327 basis points in September as against 365 basis points in August and 1,017 basis points in July. In October, the call rate averaged 6.95 per cent while the average OBB rate was 6.08 per cent, the spread being mere 87 basis points stability to regenerate confidence in the Nigerian markets and to further stimulate growth.
The MPC is conscious of the upside risks as a result of quantitative easing but holds the view that progress in the execution of capital projects and favourable outlook on agricultural output growth will moderate the upside risks. The priority, therefore, is to stimulate growth in output and ensure financial stability with a view to improving the effectiveness of monetary policy.
The AMC, when established, will take over the management of banks' toxic assets (non-performing loans) and allow the banks to run on a clean slate.
In pursuit of the proposed firm, the CBN has mandated all deposit money banks in the country to furnish it with information on their classified facilities, not later than today.
In a memo to all banks titled: "Report on classified facilities" and signed by Samuel Oni, CBN's Director of Banking Supervision, the apex bank stated: "In continuation of efforts to strengthen the banking system, the CBN has resolved to address, on a holistic basis, the issue of delinquent facilities in the banking system, especially the exposure of banks to the capital market.
"In this regard, preparatory to the establishment of the AMC, it has become expedient to obtain information from all Deposit Money Banks on their classified facilities."
According to the CBN, "specifically, the information required will cover details of collateral obtained for classified loans, securities owned by subsidiaries in respect of proprietary positions, investments and crystallised underwriting investments and banks' securities held in respect of proprietary positions, investment and crystallised underwriting investments."
In the same vein, the CBN has ordered the country's banks to report suspicious cash transactions from people involved in politics.
According to the British Broadcasting Corporation (BBC) regulations, published on the CBN website, now require banks to report large movements of cash between accounts if one of them belongs to a "politically exposed person".
These are defined as former heads of state, politicians, local council chairmen, court officials, soldiers and members of royal families.
Many "politically exposed people" are major shareholders or directors in Nigeria's banks.
Under the regulations, the identity of anyone making a transaction above N250,000 ($1,651, £1,013) must be checked.
The CBN has a list of "red flag" suspicious transactions that it says should trigger investigations.
But a BBC reporter in Nigeria says the people behind corruption and money-laundering in the country will already be working out ways around the regulations.
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