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CBN directs banks to keep 50% of public sector deposit as cash

By on July 24, 2013

The Monetary Policy Committee,MPC, of the Central Bank of Nigeria,CBN, on Tuesday, voted unanimously to raise the Cash Reserve Ratio,CRR, for government deposits from 12 to 50 percent.

The CRR which is the percentage of deposits banks must keep with the CBN as reserves.

The move is seen by observers as a way to curtail spending as the country gradually approach the 2015 general elections.
The percentage prescribed for private sector deposits would however remain at 12 per cent, for the 11th consecutive time, as part of measures to compel banks to increase lending to the private sector, and reduce the quantum of currency in circulation which has over the years been crowded out by government borrowing.

CBN Governor, Sanusi Lamdo Sanusi, while confirming the development said “We introduced increase in CRR for a number of reasons; first of all you have got liquidity surfeit in the banking industry. As I speak, we have about N1.3 trillion sitting in banks belonging to government agencies.

“Now the funds are basically there at zero per cent interest and the banks are lending about N2 trillion to the government and charging 13, 14 per cent.

“Now that is a very good business model, is it not? Give me your money for free and I will lend it to you at 14 per cent. Why would I go and lend to anyone?

According to him, “If you want to discourage such perverse behaviour, what you need to do is to basically take away some of that money and therefore the Reserve Requirement is supposed to make sure that such excess liquidity in the banks balance sheets is taken away.

“We have about six or seven banks that really account for the bulk of this money, we have done the numbers and we are not going to put them into distress.”

A communiqué issued at the end of the two-day meeting and signed by Sanusi, showed that members of the committee voted “nine to one to introduce a 50 per cent CRR on public sector deposits. This will be applied to federal, state and local government deposits and all MDAs. For other deposits, CRR will remain at 12 per cent.”

Meanwhile, the MPR for the umpteenth time retained the benchmark Monetary Policy Rate,MPR, at 12 per cent, despite the noted drop in inflation to 8.4 per cent in June, from 9.0 per cent, a month earlier.

Speaking further, Sanusi said the Committee “expressed strong concerns about the risks posed to government revenues from oil theft, less than expected production, new discoveries of shale oil, the fast increasing number of African oil exporters, the dwindling market for Nigerian crude as well as the inevitability of a fall in global oil prices and capital flow reversal, which may impact the current global (dollar) carry trade, for which Nigeria has been a major beneficiary.”

One Comment

  1. Rotex

    July 24, 2013 at 7:43 am

    Do this man know anyything about monetary policies and its application @all? He needs to be corrected b4 the economy crumbles completely