• As Naira shortage pushes interbank rate to 150%

Bank customers who do not earn foreign exchange (forex) will henceforth not be able to secure dollar-denominated loans, the Central Bank of Nigeria (CBN) has said.

CBN Director, Banking Supervision, Mrs. Tokunbo Martins, broke the news yesterday at the CBN-Financial Institutions Training Centre (FITC) continuous education programme for Directors of Banks and Other Financial Institutions, held in Lagos.

She said the policy shift followed the continuous depreciation of the naira and subsequent rise in foreign currency exposures of banks in naira terms.

She said the currency depreciation, which intensified following the introduction of the flexible exchange regime, had increased the loan repayment obligation of borrowers and threatened their capacities to meet contracted loan repayments.

“Banks may, therefore, need to restrict extending foreign currency denominated loans to customers that do not earn foreign exchange,” she said.

Speaking on the theme: Current Regulatory Requirements and their Implications, Mrs Martins said the CBN introduced the flexible forex policy to address the challenges experienced in the forex market. “The objective of the new regime is to enhance efficiency and facilitate a liquid and transparent Foreign Exchange Market. It is pertinent to note that, although the regime is flexible, CBN intervention in the inter-bank market is allowed, and can be direct or through dynamic secondary market mechanisms,” she said.

“One of the fallouts of the flexible exchange rate regime is increase in volatility in forex market, resulting in heightened exposure of banks to foreign exchange risk. Consequently, banks may need to tighten their controls and monitor their foreign currency positions more closely,” she stated.

Speaking on Treasury Single Account (TSA) implementation, Mrs Martins said the TSA regime precipitated some unintended consequences, affecting the operations of banks, especially regarding deposit depletion, asset quality, decrease in revenues and liquidity stress.

According to her, the aggregate deposit transferred to the CBN from the inception of the TSA regime to March 2016 was N2.67 trillion. This sum, which represents 15.14 per cent of the total deposits of commercial banks of N17.63 trillion as at April 30, constitutes the volume of deposits “lost” by banks as a fallout of the implementation of the TSA regime.

“This loss impacted banks differently in line with the proportion of their balance sheet that was sustained with Federal Government of Nigeria (FGN) deposits. Due to its large size and low cost, Federal Government of Nigeria deposits were a huge source of revenue for banks. Although specific data on revenue attributable to FGN deposits is not available, a good proxy is the yield on Treasury Bills, which is currently around 14 per cent,” she said.

Mrs Martins said assuming the entire government deposits were invested by the banks in Treasury Bills, at the current yield of 14 per cent, it would generate interest income of about N374 billion for the banks. This figure, she said, provides an indication of revenue that is no longer available to commercial banks due to introduction of TSA.

Mrs Martins said that based on the large quantum of revenue earned from government deposits, majority of commercial banks had created teams with responsibility for mobilising public sector funds.

“These teams, which were large and significant, were in some cases directly supervised by top management staff. The introduction of the TSA regime and resultant depletion in government deposits and related revenue has made these teams unprofitable and their existence untenable. Therefore, most banks had scaled back or disbanded the teams and, in extreme cases, released staff deployed to the teams,” she said.

The CBN director said the TSA regime impacted the liquidity level in the banking system due to the attendant remittance of cash, which constitutes a major portion of banks’ liquid assets to the apex bank. “Furthermore, as part of risk management, banks with large government deposits mitigated their positions by investing the liability in T-bills and FGN bonds. These banks had to liquidate these investments in order to comply with the TSA regime, thereby further reducing their stock of liquid assets,” she said.

Mrs Martins explained that with the introduction of the TSA regime, easy and risk free revenue that was hitherto available to banks via investment of FGN deposits in Treasury Bills and Government Bonds had been restricted.

“Therefore, banks must become innovative in generating revenue to support their operations and provide returns to their shareholders. This development also presents an opportunity for banks to return to their traditional role of savings aggregation and financial inter-mediation. Banks should thus strive to increase the size of their loan books in order to increase their interest and fees income,” Mrs Martins said.

In the meantime, overnight interbank rate was quoted at a record high of 150 per cent on Tuesday, two days after commercial banks placed funds with the Central Bank of Nigeria to participate in last Friday’s currency forward auction.

Traders said few deals were done on Tuesday due to a shortage of naira on the money market, with banks unwilling to place funds among themselves until the result of Friday’s currency auction was published.

On Friday, the CBN held a two-month dollar forward auction to clear a backlog of demand from airlines, manufacturers and other companies, as the exchange rate crisis deepened.

Traders said the banks were later directed by the CBN to re-submit bids again on Monday.

It was learnt that rates spiked because banks were barred from the CBN’s repo window before any currency auction. The CBN had not announced result of the auction as of Tuesday.

“Most banks are not quoting rates because they are still waiting for the result of the FX auction,” one trader said.

The regulator has been tightening liquidity and intervening directly with dollar sales to banks to support the ailing naira, hit by the fall in oil prices, the nation’s economic mainstay.

Overnight rates closed at 128 per cent on Monday after they opened at 100 per cent, up from 14 per cent on Thursday.

The money market ended with no deals on Friday as lenders held onto naira to be able to participate at the auction.

The overnight interbank lending rate soared to a record high of 128 per cent on Monday on naira cash shortages after commercial banks  funded their account with the Central Bank of Nigeria to participate in last Friday’s currency forward auction.

Overnight rates opened at 100 per cent on Monday, traders said, after the money market ended on Friday with no deals as commercial lenders held onto naira to be able to participate in the auction, Reuters reported.

Overnight money had traded at 14 per cent on Thursday.

Nation with additional report from Punch