Banks’ borrowing from CBN drags system liquidity to N7.60bn deficit

LOCAL banks re-opened fresh repurchase (Repos) agreement and increased their Standing Lending Facility (SLF) positions with the Central Bank of Nigeria (CBN) causing system liquidity to roll back into a deficit of -N7.60billion. Consequently, Open Buy Back (OBB) and Overnight (O/N) rates closed at 17.50 per cent and 17.75 per cent, respectively.

Commercial Banks in Nigeria are increasingly borrowing cash from the central bank’s Standing Lending Facility,

Also repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities.

In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price.

Due to the liquidity condition in the banking system, the CBN in April 2021 reviewed and fixed applicable rates for the Standing Lending Facility (SLF) and Standing Deposit Facility (SDF) at 12.5 per cent and 4.5 per cent, respectively.

SLF is a line of short-term credit available for commercial banks to draw on when they need to meet immediate short-term withdrawals from their customers.

Commercial banks can also deposit free cash with the CBN via the Standing Deposit Facility (SDF).

According to the data seen by Nigerian Tribune, commercial banks have consistently recorded net borrowings from the CBN since April this year, in a worrying sign that some banks might be struggling with meeting their short-term liquidity obligations.

Industry watchers are worried that since April 2021, there have been more drawings from SLFs compared to SDFs every single day except for once.

Typically, during cash squeeze situations, experts say the logical thing to do would have been to liquidate their short-dated instruments such as treasury bills in exchange for cash, but that option can lead to inadvertently unwanted loss from the investment.

For example, banks who bought treasury bills when yields were less than two per cent earlier in the year will lose money if they decide to sell the same treasury bills now that yields are higher. This is probably why they will rather borrow from the CBN.

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