A new debit: “The Central Bank of Nigeria has debited the sum of N838.32 billion from 15 banks for not meeting the minimum cash reserve ratio (CRR). The CRR is the percentage of customers’ deposits that must be kept with the central bank. At its current rate of 32.5%, commercial banks must deposit N325 for every N1,000 deposited by their customers.” Yes, it looks crazy for the apex bank to be debiting commercial banks. Hold on – ask to see the books, and you will understand while this happens all the time in Nigeria.
Assume you have N1 billion customer deposits, and you are required to keep N325m with the central bank, where the money makes nothing of value. But instead of doing that, you send only N125m and lend N200m at 27% interest rate to your customers.
If CBN comes later to debit you on that N200m say 1% or whatever, you will be fine. So, this is a pure cost of doing business when the risk is determined, and not nothing serious and devastating. The banks understand that and this debit has been happening. Simply, they are fine with the debits provided it stops with the debits; They make better money from the customers.
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If any person has a better explanation, let me know. Why? In a bank’s general ledger, any operation boss can see his/her CRR at the end of day (IT does that in the night and the data sent to Heads of Operations the next day).
So, if there is a variance with CBN ratio, and the bank does not rectify it the next day, it means a threat of debit is not an issue for the bank! Why keep it with CBN for nothing when you can lend it at 27%, knowing that if caught, the fine is at 1%?
Update: Note this changes if the CBN debits that N200m with fine on it. In that case, the bank loses. Yet, it comes down to how long it takes for CBN to debit and fine.
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Comment: Prof, trying to understand the maths you provided but here’s the playbook; CRR is a statutory requirement and currently it’s 32.5% of total deposits (which varies as transactions are done) which you must keep with CBN. So you don’t have access to that cash for lending. However, there’s also another ratio the Loan to Deposit Ratio- LDR (which now is christened Loan-to-Funding) which is 65%. Literally means you should loan 65% of your funding to spur growth. So whether you lend the 200m in your case study or decide to keep it, once the CRR ratio is computed and it’s short, you get debited.
The CBN May then decide to lend the CRR at single digits through banks to boost economic activities in the country when the need arises.
On your question about why banks may prefer to get extra CBN debits than lend is quite simple. In an economy where global yield curves seem inverted (recession likely to come) cash is king and risk taking should be lower. So you rather at peace keeping your cash with CBN at 0% than creating bad loans that will affect your institution.
Maybe you can throw more light on what you meant as it wasn’t really quite clear.
My Response: I must have written this poorly. Apologies for that. Your comment means what I had in mind was not the way it came. Here is what I am trying to say. The CRR is 32.5% by regulation. You have a customer deposit of N1 billion. If you follow the regulation, you would be expected to keep N325m with the apex bank. That money yields nothing for you as a commercial bank. But you can also decide to “violate” that and instead of sending N325m to CBN, you send only N125m. The remaining N200m stays with you and you lend it to your customers at 27%.
Later, CBN will come after you for not meeting the CRR. It sees you are off by N200m and fines you 1% on that N200m. My point is this: banks prefer that fine because they have made 26% after the fine. And that is why this continues to happen for years.
Comment 1b: Prof, I think you are misunderstanding the flow. Okay, first, fines doesn’t not exonerate you from meeting the regulatory requirement. So it’s more like a punishment. Irrespective of whether you are fined or not, you will still get debited the 200m. But in reality, what happens is the CBN without recourse to you passes the debit to your account with them so it’s not a case of choice. That way no rooms for fines. If you lend the 200m and still get d debit of CRR from 200m, you are basically contributing to your LDR. I hope this is a bit clearer.
Comment 1c: Thank you Odinaka for more clarity . I think banks attract some punitive measure, possibly a fine , for not keeping the L/D ratio. A bank would prefer to abide by all regulator ‘s requirements
than fall into their bad books and be known as not a good player in the financial market.
My Response: Check well – I may have a point. If the debit is done in October, even though CBN can take that N200m with a fine, I had used it for a really long time. So, this does not change my thesis. Why? The point has not explained why every Oct/Nov, CBN debits at least 10 banks for CRR violations. Yes, we can trade with this money and in Oct, we are fined a small fee and CBN debits the money but we have made money over 10 months.
May I add that I find it hard to believe that extremely smart people like bankers in Nigeria will allow themselves to be fined yearly if they are not making up those fines via another way. This fine is “constant” as CBN does it yearly and the fine has not stopped the violations. For me, this is a strategic violation as every bank after EOD (end of day) knows its CRR and could have complied since banks like to make money and fines do not help. So, there is something here..
Comment 2: These economist and their economic thinking, at the expense of real philosophy of growth and development, is really fascinating to me sometimes. Is it not the CBN that recently increased the LDR (loan deposit ratio) from 60% to 65% to encourage DMB’s lending to the real sector to spur the country’s economic growth and job creation? In the past, some banks have been penalized for not lending up to the 65% threshold. Around June or so, only five banks were even able to meet it. Among these five, some lended up to 89% of their deposits or so.
None among the big 5 banks we know made the cut. But in the same breadth, the apex bank is now using the new CRR policy (from 27.5 to 32.5%) to squeeze that same liquidity/money supply out the real sector. My question is, do these strategies/policies really get to be effective at dealing with the economic growth and stability problem we have as a country, not to talk of the inflation problem which is but a part of the larger (low productivity) problem we have? I get confused of the effectiveness of these two-sided policies and wish that someone can truly explain to me their effectiveness in actual terms.
My Response: Good observation. You want lending to rise and you also want them to send you more cash to keep.
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We like using big words and jargon to confuse people, but at the end of the day – none of them can hide the mediocrity and atrocious productivity. To make it simple, we are running ‘interventionist economy’, and for you to do that successfully, you need to distort the right order of things, arrogating excessive power to yourself in the process.
Our commercial banks are very ordinary and weightless, and the ultimate commercial bank here is the CBN, but at the same time it needs to fund all its interventionist ideologies. Why do we need CRR above 30%, and why not 10%? One explanation could be that the CBN does not see the commercial banks as being relevant in the economic space, so it used backdoor to usurp their roles…
With deposits drying up because not enough people have decent income sources, let alone saving money in their accounts, the squeeze becomes more palpable. As the banks gather deposits, the CBN is withdrawing a large chunk, but we still need plenty liquidity to power the economy; therein lies the quandary.
There’s too much government interference and distortion in the economic space, it’s far from liberal, so neither the commercial banks nor the real sector are capable of flying high.
We are bewitched somewhat.