CBN Says No Bank Is Distressed

The Central Bank of Nigeria (CBN) has cleared the air on the state of health of banks in the country, stressing that no bank is distressed or suffering from inadequate capital. CBN governor, Godwin Emefiele refuted recent reports in the media that three banks had been directed by the apex bank to shore up their capital base before June next year.

This is as the apex bank also announced a cut in monetary policy rate (MPR) for the first time in almost four years.

At the end of its two-day Monetary Policy Committee meeting, Emefiele announced a 200-basis points cut to 11 per cent in headline interest rate from 13 per cent previously.

The apex bank also slashed the Cash Reserve Ratio (CRR) from 25 per cent to 20 per cent, the deepest cut in the harmonised rate following a smaller easing done by the CBN last September.

The decision to cut both the monetary policy rate and the cash reserve ratio, the CBN governor said, was to engineer growth by increasing the flow of lending to critical sectors of the economy, like agriculture, solid minerals, critical social infrastructure and manufacturing.

The committee also changed the symmetric corridor of +/-2 per cent to an asymmetric corridor of +200 basis points and -700 basis points.

Fielding questions from journalists after the Monetary Policy Committee briefing yesterday in Abuja, Emefiele, who cleared the air on banks which may be going through capital adequacy problem, said that the Central Bank had its own internal mechanism for determining the strategic health of all banks through its daily stress testing of the operations and activities of banks.

“We stress-test their balance sheet and their profit and loss on a regular basis using different scenarios to determine tight or loose liquidity and what will be the result on the banks’ capital adequacy or liquidity ratio as the case may be. For instance, there are banks today which are expected to have minimum capital adequacy ratio of 10 per cent; it may turn out that the bank, instead of 10, has 10.5 per cent, what we do is to have an informal interaction with the bank to advise them against falling to the minimum. By the time we carry out some of this stress-testing, we hold informal discussions with the bank about the level of capital adequacy issues.

Emefiele said the committee was concerned about the state of unemployment and low productivity levels in the in the country and evaluated various options for ensuring increased credit delivery to the key growth sectors of the economy capable of generating employment opportunities, and improving productivity and growth.

Explaining the implication of this move for the banks, Emefiele said: “Currently, what we’ve found is that when banks are in need of liquidity, they come to CBN as lender of last resort and borrow at 200 basis points above the MPR. But if they have excess liquidity, they give the liquidity to the CBN and CBN pays MPR minus two per cent – which is 11 per cent.

“But, unfortunately, what we’ve found out is that instead of banks to deploy their liquidity to the real sector to create credit, stimulate growth, what the banks do is to dump their money on CBN and earn 11 per cent for doing nothing.

“So what we’ve decided is that now that the MPR is reduced, it means that if banks need money, they will access it from the CBN at 11 per cent plus two per cent – which is 13 per cent, but if they want to bring their money to CBN, they will only earn MPR minus seven per cent – which is four per cent. Hopefully, that will be a disincentive for banks to dump their monies on CBN rather than loan this money to the real sector and the relevant sectors of the economy.”

Emefiele further stated that the committee underscored the need for banks to ensure that measures taken by the bank to inject liquidity and stimulate the economy adequately translate into increased lending to the sectors with sufficient employment capabilities and the potential to generate growth.

He noted that, going forward, any attempt by the CBN at easing liquidity into the system shall be directed at targeting real sector, infrastructure, agriculture and solid minerals.

The MPC further directed banks’ management to put in place necessary measures/regulations to ensure strict compliance by the DMBs. This is aimed at ensuring that employment and productivity is stimulated while also moderating prices.

Emefiele said the CBN will send a circular to banks about the modalities of their operations.

“We are going to identify which companies or which sector falls into what we categorise as real sector. We will identify businesses which will stimulate agriculture; is it farming of rice, tomatoes – all the products will be identified and we will see to it that the banks comply to this.

“The banks will analyse and appraise their credit proposals just like they do currently for all other intervention programmes we have at the Central Bank of Nigeria, and if we are satisfied that those proposals meet our minimum requirement, we will release the naira amount that is equivalent to that sector to the banks to disburse directly to these projects. That is one way we can see to the fact that because we are reducing liquidity, the liquidity will go a long way to support the areas that we think we need support at this time.

“At the last MPC meeting, we took the decision to begin to ease and that was why, at that meeting, we reduced the CRR from 31 per cent to 25 per cent. Unfortunately, we thought that by allowing the banks to have free access to the liquidity, that the funds will be channelled to those sectors that we think will be employment-generating sectors that will support growth, increase development and reduce unemployment. Unfortunately, that hasn’t happened.