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Banks to lose N40bn to new CBN regulation

By on November 11, 2014

Deposit Money Banks will lose over N40bn in interest income to the Central Bank of Nigeria’s new regulation which reduces lenders’ remunerable daily placement at the CBN’s Standing Deposit Facility to N7.5bn, Afrinvest Research has shown.

This comprises banks’ interest income from November 2014 to December 2015.

The CBN had, on November 6, 2014, issued a new guideline to banks and discount houses seeking to access the SDF window.

According to the new guideline, any bank or discount house which places above N7.5bn on a day at the discount window will attract zero interest rate on the excess fund.

Industry analysts said the policy was introduced to encourage banks to lend to the real economy, rather than placing funds at the discount window.

The CBN saw the idea of placing funds at the discount as an obstacle to the much needed liquidity required by the real sector.

The Head, Investment Research, Afrinvest West Africa Limited, a research and business advisory firm, Mr. Ayodeji Ebo, said the policy might not necessarily translate into a significant increase in lending by banks to the real sector in the near term as the risk that pervaded the space remained evident.

He added, “The Federal Government needs to de-risk the real sector by providing robust infrastructure that reduces overheads and enhance profitability. This will moderate the delinquency rate as the firms (debtor) will be able to generate a return in excess of the cost of funds, hence ensures repayment of borrowed fund.”

In nominal terms, the new policy will reduce the amount of funds placed at the discount window to below N200bn relative to N562.2bn as of November 6, 2014, according to Afrinvest research.

According to the research, approximately N4.5bn or N36.2bn interest income for banks will be lost for the two months in 2014 and 2015 financial year respectively.

It, however, noted that the impact varied among the banks.

Consequently, the firm suggested that a major factor that may “spur lending is the immediate revamping of the credit bureau system which will aid scoring of loans by the banks. Based on this new policy, we expect significant increase in investment in securities especially treasury bills (short-tenored) which currently attracts above 10 per cent interest.”

“While Afrinvest Research has consistently advocated for a reduction in the corridor around the MPR (+_ 200bps of 12 percent ) by a minimum of 200bps in the past six months, we believe this new policy will alter interest income mix of the banks as well as spur lending to the real sector in the long run. The terrain remains choppy for Nigerian banks as the banks navigate through the incessant CBN policies to remain competitive and profitable.”

 

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