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CoT: Banks’ hide-and-seek worries CBN

By on July 14, 2014

The recent warning by the Central Bank of Nigeria against the regime of excess charges by banks has again underscored the need for Nigerian banks to concentrate on financial intermediation instead of the rent-seeking culture, which has been the bane of modern banking in the country, reports Festus Akanbi

Following the impressive showing of a number of Nigerian banks in the latest rating of the Bankers Magazine, where 13 Nigerian money deposit banks were listed among the leading 1000 Global Banks in the 2014 edition of the magazine, it is natural for the regulatory authorities in the banking sector, the affected institutions and their shareholders to celebrate the perceived resilience of the Nigerian banks.
For a sector that was almost at its knees in 2008 before the immediate past management of the CBN unveiled and prosecuted a robust rescue package that safeguarded depositors’ funds and rescued a number of banks from precipice, the ability of the Nigerian banks to move shoulder to shoulder with the best financial institutions in the world is, no doubt, a sign of recovery worthy of celebration.
The Nigerian banks that made the ranking based on Tier-1 capital are Zenith Bank, Guaranty Trust Bank, First Bank, Access Bank, United Bank for Africa, Fidelity Bank and Ecobank Nigeria. Others are Skye Bank, First City Monument Bank, Diamond Bank, Stanbic IBTC Holdings, Standard Chartered Bank Nigeria and Union Bank of Nigeria.

Beyond the Ranking
However, while the affected banks are still basking in the euphoria of the new found positive ratings, other members of the banking public including the regulators and customers may not be very excited amidst the report that some banks owe their robust financial positions to a deliberate contravention of the policy on charges and commissions.
In what looks like a case of robbing Peter to pay Paul, information at the disposal of the CBN showed that in their desperation for higher profit margins, a number of banks have continued to defy the directive on the phased cancellation of Cost of Transaction by banks.
In a circular dated June 11, 2014 and titled: ‘Implementation of the revised guideline to bank charges- Commissions on Turnover’, referenced FPR/DIR/GEN/CIR/01/008, the CBN said information at its disposal indicates that some banks continue to charge CoT at the rate of N3 per mile, which was the agreed rate for 2013.
The circular reminded all banks that the maximum CoT for 2014 as contained in the guide jointly agreed between the CBN and the Bankers Committee (comprising chief executives of all banks, among others) remains N2 per mile.
It, therefore, directed all banks that have charged customers in excess of the agreed CoT since March 27, 2013 “to refund same to the affected customers, not later than 30 days from (June 11, 2014).”
The CBN noted that the guide was part of efforts to standardise charges for various products and services offered by banks in the country, lamenting a situation where the banks have continued to abuse the portion that says that CoT is negotiable.
It reminded all that the document specified that such charges must not go beyond the maximum of N3 per mile in 2013, N2 in 2014, N1 next year and zero CoT by 2016.
The circular, signed by Franklin Ahonkhai for CBN’s Director of Financial Policy and Regulation Department, did not, however, say what would happen to those that fail to refund such excess charges.
Some banks were also said to be charging fees not specified in the guide but which are hidden under all sorts of names.
“For example, some banks offer accounts that are supposedly CoT-free, but impose a maintenance or similar fee, (which is) not covered by the guide.”

Tightening the Noose
The tight monetary policy stance adopted by the apex bank, through the lid placed on public sector fund, last year, had raised the fear that the sterilisation of public sector fund was bound to leave some banks dazed, especially as it happened in the last quarter of the year when banks had to double efforts to meet their targets for the year.
An analysis of the 2013 performance figures showed that virtually all the banks decided to take the issue of deposit mobilisation seriously as shown in the increase in deposit base although the degree of success recorded in this area varies from bank to bank.
The CBN had last year begun the withdrawal of over N1 trillion public sector funds from deposit money banks as part of its new Cash Reserve Requirement policy.
The new policy, which called for the withdrawal of 75 per cent public sector funds in order to mop up liquidity in the system, was approved by the Monetary Policy Committee (MPC).
The cash reserve ratio (CRR) was pushed from 50 per cent to 75 per cent while liquidity ratio and CRR on private sector deposits were also maintained at 30 per cent and 12 per cent respectively.
Since August 2013, when the CBN raised the CRR from 12 per cent to 50 per cent, banks have continued to struggle to source for deposit from private sector and individuals, through increasing interest rate of savings accounts and other facilities.
The Big Question
Amidst the reports by the apex bank that some financial institutions are still reneging on the pledge to adopt the resolution of the CBN and the Bankers Committee on the gradual phase out of CoT, financial market analysts said the reality is that the management of some of the banks are either bereft of ideas on how to find alternative sources of revenue or just cashing in on the failure of the apex bank to wield the big stick.
One of the issues raised is that having tightened the noose against banks with the planned phase-out of CoT, higher cash reserve ratio and the removal of deduction from ATM services, the reality is that banks’ profit stream is threatened.
In the past, a number of banks had to jostle for public sector accounts through the collection of various rates and bills on behalf of the government. The commission and charges derived from these services formed the bulk of banks’ earnings. These include PHCN bills, custom duties, sale of forms, and so on.
Analysts believed that as sources of revenue of banks shrink, turbulent future awaits Nigerian banks. The CoT which is fixed for N2 per mile at present will come down to N1 next year and removed completely in 2016.

Banks under Pressure
In his analysis of the emerging scenario in the Nigerian banking industry, Head, Research and Intelligence, BGL Plc, Mr. Olufemi Ademola, said banks are under pressure because of their failure to do the needful.
According to him, “Banks are supposed to be doing proper financial intermediation. The fact is before now, Nigerian banks were not functioning as money deposit banks. Everywhere you go worldwide, banks don’t impose charges. “If you have an account in United Kingdom, you won’t experience these kinds of charges. Banks are supposed to use their money for lending, so they are supposed to do good financial intermediation, good risk management and then lend to people that need money; collect money from people that want to save and then they will be able to make some good returns. But what they do is to give themselves targets for deposit and this money they gave target for are used in buying government securities.”
Justifying the tough measures on revenue generation activities of banks, Ademola said: “The reason why the CBN is giving that cash reserve ratio is because most of the funds that go to banks are from the government and these are the money government is taking from them with interest. This is cash round-tripping, so government decided to stop this. So if they now find out that banks are now using that money to lend, especially to the manufacturing and productive sectors or that they are giving the money out then it makes sense. Even mortgage- housing that supposed to be fully secured are not being funded by banks, how much other kinds of businesses that have some inherent challenges.
“So, what the CBN is doing is to actually make banks do what they are supposed to do, which is lending.”
There was the argument that the CBN’s tough policy on non-performing loans are keeping banks away from lending, but the BGL official said there are enough mechanism for banks to determine risk free lending.
Fear of Non-Performing Loans
He said, “Yes, one can argue that during the time of Sanusi Lamido Sanusi, banks were not encouraged to lend because of high handedness, but even at that, the only thing he wanted was to know why you are giving the money out, put control and processes to be sure the fund is secure. Today, if I have a business and approach the bank, they may not give it to me but they won’t hesitate to dine with politicians who will take their money without the intention of repayment. That is why the CBN wants banks to make money from interest income.”
A report earlier in the year by Renaissance Capital had noted the impact of tougher regulation, following which Nigerian banks are facing serious challenges, particular to delivering returns above 20 per cent of their cost of capital, compared with their peers in sub-Saharan Africa.
Rencap said in the report titled: ‘Nigerian banks: The impact of tougher regulation’ that commission-on-turnover fees were fairly significant contributors to non-interest revenue (NIR) in full-year 2012, especially for the larger banks.
“At full-year 2012, commission on turnover contributed 40 per cent to Non-Interest Revenue for Zenith and First Banks, and 12 and 10 per cent to total income, respectively.
“The least affected of the Tier 1s in full year 2012 was Access at 14 per cent of NIR and 5 per cent of total income.
“Of the Tier 2 banks, Diamond, First City Monument Bank (FCMB) and Skye were the most affected, while Stanbic IBTC and Fidelity were the least,” Rencap added.
Another tough regulation, the report noted, was “the increase in the public-sector CRR to 50 per cent (currently 75 per cent), will reduce interest income for the banks by (between) one and six per cent annually.
This, the report said, was significant, considering the fact that most of them had exposure to public sector funds in the 10 to 16 per cent range.
In the plan to phase out CoT, the CBN specifically directed all banks to reduce CoT from its current rate of N3 to N2 by 2014, N1 by 2015 and banks are not expected to charge for CoT on current account transactions by 2016.
This formed part of the banking sector watchdog’s “Revised Guide to Bank Charges,” dated March 27, 2013, a copy of which was posted on its website.
The 36-page document, according to the CBN, would become effective from April 1.
It explained that CoT applied to customer-induced debit transactions on current account, even as it warned commercial banks not to charge CoT on “returned outward clearing cheques, reversal on transactions and all bank-induced debits.”
The CBN however pointed out that for loan repayment from current or savings account, CoT is free.
The Guide to Bank charges, first issued in 2004, was meant to provide a standard for the application of charges in the banking industry, and to minimise conflicts between banks and their customers.

 

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