TSA, FX intervention, liquidity shortfalls drag banks’ borrowing to N316.68bn

Facts have emerged that due to existence of Treasury Single Account (TSA) with continuous intervention in the foreign exchange market by the Central Bank of Nigeria (CBN) arising to liquidity stretch in some Deposit Money Banks (DMBs) have all been linked to the Standing Lending Facility (SLF) window currently standing at N316.68 billion.

SLF is a window in which commercial banks access to borrow money from the apex bank, while accessing Standard Deposit Facility (SDF) to place deposit, with charges of five per cent as interest rate on loans to banks through the SLF while two per cent as interest on deposit placement through the SDF.

It is however worthy of note that financial institutions sourced funds mainly by drawing down their reserves with the apex bank, as well as frequent patronage of the regulator’s SLF.

According to the central bank’s ‘Understanding Monetary Policy series 4’, high demand for SLF by money market operators indicated tight monetary conditions in the money market.

However, the daily closing balances of the DMBs with the apex bank reflect the level of liquidity in the banking system.
Significantly low balances, other than the statutorily required reserves, indicate tight monetary conditions, while large balances signify that the system is highly liquid. Correspondingly, the interbank rates are inversely related to the level of banking system daily balances.

The Daily Times checks have it that during periods of liquidity shortage, money market operators access the standing lending facility window more frequently, requesting for large credit facility in order to square-up their positions at the close of daily business. But in times of surplus, however, money market operators access the standing deposit facility window to lodge their excess funds.

For instance, the SLF level stood at N316.68 billion in April compared to N249.74 in March and N224.57 billion in February.

This means that of recent, more banks are depending on the apex bank loans to meet their cash obligations, following the lack of liquidity in the banking system.

In an exclusive telephone chat with our correspondent over the weekend, Managing Director/CEO, Cowry Asset Management Limited, Mr. Johnson Chukwu, explained that banking system has been going through some liquidity stretch.

Although he explained further that not at equal level, because while some banks have relatively good liquidity, a number of banks are struggling to maintain their liquidity system position.

“It is not strange, if you look at the fact that no major new fund is coming into the system and Federal Government funds are no longer effective with the system due to the TSA. More so, the central bank has been selling FX at an increasing rate, which has been sucking the Naira liquidity from the banks”, Cowry boss explained.

According to him, the frequent FX intervention by the CBN has the impact of taking out liquidity from the Deposit Money Banks, which is why we are seeing banks being stretched.

“But it is a business circle, however what happened is because we are dealing with arrears. It may not come back immediately but once they clear those arrears and it is a normal fresh inflow diversion that has been executed, then we would see a normal circle but for now, the interventions meant to clear arrears have the impact of taking out liquidity from the banking system and that is why you are seeing the liquidity stretch level increasing consistently.

“The fact is that liquidity is going out of the system, because of the frequent intervention in the FX market by the apex bank, we have to understand that the amount of liquidity in the economy is a finite figure is an indefinite figure”, he said.

He pointed out that when the liquidity is being sucked out by the CBN through the sale of FX, it will have a direct impact on the banks vaults, and that is what is manifesting in the increase of the SLF, and you would also see the SDF reducing because few banks are putting in money there.

To worsen matter, there was a special Treasury place auction between March and April, to take out liquidity by the net placers who have refused to place money with the other banks. Those who like keeping their funds with the central bank, there was a special intervention through Treasury bills to those banks. Although, the difference is that the bills are tradable and that further reduced systemic liquidity in the banking system.

Meanwhile, the offer of high yield (high interest rate) on risk free instruments like Treasury bills, for instance, 364 day bills at some point doing about 18.7 per cent which effectively is about 22 -23 per cent have the impact of encouraging the private sector to rather invest in such Treasury bills, and of course, any fund that leave the banks to the CBN reduces the amount of the liquidity of that particular bank and the entire system liquidity.

So, the impact of high yield on risk free instruments is that a lot more depositors would rather switch their investment to such instrument that is given them yield that even the banks cannot match.

Meanwhile, for frequent borrowing from the apex bank by commercial banks, the regulator recorded N3.29 billion as interest income in February 2017.

The huge patronage by banks was to make up their positions, either borrowing from the CBN or depositing excess reserves at the end of each business day, especially for some that were hit hard by persistent liquidity mop up, payment for dollar, treasury bills and bonds’ auctions.

An analysis of the recent data showed that the there was more patronage of the SLF facility than the SDF window, an indication that the banks were cash-trapped.

However, financial analysts expect SLF Rate and Standing Deposit Facility Rate (SDFR) to be retained at +2 per cent and -5 per cent respectively.

Hence, they expect the Cash Reserve Ratio requirement to be reviewed downwards by 250bps from 22.5 per cent to 20 per cent on account of persistent liquidity strain in the financial system, occasioned in part by crowding out effect of increased public sector borrowing to fund the fiscal deficit and which may have resulted in difficulty for lenders to fund foreign exchange demand of end users.

However, the central bank sells hard currency regularly on the interbank market to boost dollar liquidity but in turn mop-up the naira. If it does not take up all offers, the excess naira is returned to lenders.

Mired in recession, Nigeria is grappling with a currency crisis and dollar shortage brought on in part by the low price of oil, the cornerstone of Africa’s largest economy.