Deposit money banks are aggressively strategising on how to boost private sector deposit generation, particularly from small savers, following the withdrawal of 50 per cent public sector deposits from the banking system by the Central Bank of Nigeria (CBN) last week.
Findings reveal one of the strategies adopted include increasing the interest rates on savings accounts in order to provide added incentives to customers to attract more savings deposit, which is the cheapest source of income outside of the government deposits.
An analysis of banks’ deposit and lending rates before and after CBN’s pronouncement on government deposits indicates that banks that were yet to comply with the minimum 3.6 per cent interest rate on savings have raised their rates to reflect the new minimum, thus increasing their costs of funds.
In the revised guide to bank charges which became effective from April 1, this year, the CBN pegged the interest on savings deposit accounts at a minimum of 30 per cent of the Monetary Policy Rate per annum, which translates to 3.6 per cent.
However, many banks had failed to comply until the recent pronouncement on government deposits was made and thus tightening banks’ liquidity.
For instance, banks’ deposit and lending rates published by the CBN for weeks ended July 12 and August 2, 2013, indicated that Fidelity Bank Plc, Wema Bank Plc and Skye Bank Plc all moved their lending rates from 2.0 to 3.0 per cent, 2.7 to 3.75 per cent and 0.40 to 3.6 per cent respectively.
Members of the organised private sector (OPS) who commented on the move by CBN raised the alarm that, with the withdrawal of about N1 trillion from the banking system by the CBN last week, interest rates to the real sector may go above 30 per cent.
In an interview, the stakeholders said the policy will have adverse effect on the real sector as they will have to borrow from banks at a higher interest rate, resulting in increased costs and higher prices of products.
Head of research, Africa, at Standard Chartered, Razia Khan, said while this is bad news to individual banks in the country, it is a good move for the economy.
“For banks that are overly-dependent on public sector liabilities, things will certainly become more difficult. Not only will their implicit cost of funds increase, but the days of making easy returns by mobilising public sector deposits and re-investing them in high-yielding government securities are over.
“They will have to try harder to attract non-public sector liabilities in order to grow their balance sheets, paying up in order to do so. Yes, this will hurt the earnings of a certain class of banks in the short-term, but in the longer term it is an enormously positive development for the Nigerian banking system, as it forces the banks to intermediate more effectively.”
She noted in an emailed note to our reporter that, as banks increase deposits rates to attract more funds, “they will likely have to increase (higher margin) lending to the private sector, rather than simply parking their surplus liquidity in government securities for easy returns. So while the measure is bad news for individual banks, the benefits to the Nigerian economy on the whole far outweigh the costs.”
Director-general of the Lagos Chamber of Commerce and Industry (LCCI) Muda Yusuf said “the recent review of the CRR on public sector deposits from 12 per cent to 50 per cent would have profound effects on the money market as well as the stock market”.
He said that the move would profit some players in the economy and penalise others, pointing out that the country would see a further increase in interest rates which means an added pressure on the operating cost of investors in the economy.
Yusuf stated that high interest rates will ultimately affect profit margins and “the impact is not just on the real sector but the broad spectrum of investors in the economy. We are therefore likely to see interest rates moving to new thresholds of between 25 and 30 per cent. If other charges are added, the cost of fund could be in excess of 30 per cent.
However, he noted that a tight liquidity situation often enhances the stability of naira exchange rate and the moderation of inflation. This is another possible gain of the new monetary policy regime.
A senior staff of Bank of Industry (BOI) who spoke under anonymity said that the new CBN CRR is going to put pressure on banks’ deposits. Interest rates will soar further, thus stiffening banks’ loans and advances to private sector, he said. “In effect this will reduce the productive output, encourage further imports and depress our foreign exchange.”
He explained further that “the policy will have effect on the productive sector because productivity level will drop if companies are unable to borrow at reasonable rates and this will affect the productivity of industries leading to increase in price level”.
On the impact of the reduction in government deposits with commercial banks, he pointed out that this will drastically reduce banks’ deposits especially public funds and put pressure on banks and marketers to solicit or mobilize funds at very high rates from the private sector.
He pointed out that for banks that took public sector funds and granted them as loans, they will face great liquidity and interest rate risks since they won’t be able to call back the loans that they had granted to their customers.
He added that the banks that collected those deposits and placed them in treasury bills and other government instruments will face only interest rates risk, adding that some banks might not be affected by this policy because they are not exposed to public funds.