A finance and investment research firm, Cardinal Stone Research, has observed that the review of its guidelines to banks on accessing Standing Deposit Facility (SDF) by the Central Bank of Nigeria (CBN) is likely to have minor impact on the willingness of banks to direct credit to the real sector, due to a number of reasons.
In its assessment report, Cardinal Stone said the review of SDF guidelines as the latest in a series of measures put forward by the CBN to accelerate credit growth in the domestic economy is not likely to have a significant impact on the Net interest margin (NIM) of banks.
Net interest margin (NIM) is a measure of the difference between the interest income generated by banks and the amount of interest paid out to their lenders (for example, deposits), relative to the amount of their (interest-earning) assets.
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According to their report titled: “Clear Intent Minor Impact,” CardinalStone noted that the SDF pales in comparison to banks’ placements in investments securities from a size and interest rate standpoint.
For example, total banking sector investments in CBN bills amounted to N3.9 trillion as at March 2019 (December 2018: N3.9 trillion) compared to SDF of N68.9 billion, which invariably means that before the guidelines, lenders placed more funds in the former.
The CBN’s reviewed guidelines to banks required that the remunerable SDF placement for banks is now capped at N2.0 billion compared to the previous cap of N7.5 billion. Banks will not be remunerated for SDF placements above the stipulated maximum of N2.0 billion and the interest rate on the SDF shall be determined by the Monetary Policy Committee (MPC) from time to time
The new measure according to the firm, is not likely to drive real sector lending, given that banks are still able to redirect excess cash to money market instruments at the secondary market.
It further stated that the new cap on SDF placements could also force banks to direct some excess funds to interbank placements subject to the level of system liquidity.
However, it noted that sustained declines in the value and frequency of Open Market Operation (OMO) sales and the implied build-up of system liquidity (as observed in the last few months) could lead to a decline in returns from such investments.
Overall, the research outfit stated that the recent revision of SDF guidelines is unlikely to drive material credit creation in isolation.
“We, therefore, believe that the apex bank is likely to introduce additional policies to complement the recently issued regulatory measures.
Corroborating this view, Peter Mushangwe, banking analyst at Moody’s investment service says this directive is “unlikely to force Nigerian banks to grow their lending aggressively.
“In our view, the additional liquidity will likely move to the interbank market rather than lending,” Reuters quoted Mushangwe as having said.