Wednesday, 24 July 2013

CBN Introduces 50% CRR on Public Funds, Retains Interest Rate at 12%

 Says its financial report not subject to FRC's approval

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Mallam Sanusi Lamido Sanusi
The Central Bank of Nigeria (CBN)  Tuesday introduced a 50 percent Cash Reserve Requirement (CRR) on all public funds deposits in the banks' possession. The new adjustment to CRR does not however, apply to private sector deposits whose CRR was retained at 12 percent.
The central bank said it took the decision because it discovered that there was over N1.3 trillion sitting in banks and belonging to government agencies.
This came just as the CBN Governor, Mallam Sanusi Lamido Sanusi refuted media reports that the Financial Reporting Council (FRC) had refused to approve its 2012 financial reports. Sanusi said contrary to media reports, the board of the CBN had the responsibility of approving its accounts which it had done.

The CRR is a monetary policy tool used to set the minimum deposits commercial banks must hold as reserves rather than lend out. It is usually applied to influence borrowing and interest rates by changing the amount of money in banks' disposal to make loans.
Also at the end of the meeting, for the tenth consecutive time, the Monetary Policy Committee (MPC) resolved to leave the Monetary Policy Rate (MPR), otherwise known as the benchmark interest rate at 12 percent with a corridor of +/- 200 basis points.
The MPR is the rate at which the CBN lends to commercial banks. This also determines the cost of funds in the market.

Addressing journalists at the end of the 2-day MPC meeting in Abuja, Sanusi said the introduction of CRR on public funds became necessary in order to among other things, check "the perverse incentive structure" under which Deposit Money Banks (DMBs) "source huge amounts of public sector deposits and lend same to the government."
Sanusi said: "First of all you've got liquidity surplus in the banking industry. As I speak to you there's over N1.3 trillion or so, sitting in banks and belonging to government agencies.
"Now basically, they (surplus) are at zero percent interest and the banks are lending about N2 trillion to the government and charging 13 to 14 percent. Now that's a very good business model, isn't it? Give me your money for free and I lend it to you at 14 percent. So why would I go and lend to anyone."
Continuing, he said: "Now if you want to discourage such perverse behaviour, part of it is to basically take away some of that money and therefore, the reserves requirement is supposed to make sure that excess liquidity in banks' balance sheets is evenly distributed. We've got about six or seven banks that already account for the bulk of these deposits. We are not going to put them into distress."
The CBN governor, who read the committee's communique, further warned that: "If spending continues and we are concerned about the liquidity conditions, we foresee in the nearest future, continued increase in the CRR across the board as we continue to maintain tight liquidity conditions.
"In election years, everywhere in the world, not just in Nigeria, politicians spend money and spending money means pressure on the exchange rate, pressure on reserves and pressure on inflation.
"So the next 12 months would be difficult; we would have to respond at every stage and make sure that no matter what happens we do not have stability threatened,” he declared.
On the CBN's retention of MPR despite marked improvement in macroeconomic indices as well as low inflation, Sanusi said nine members voted to retain the interest rate while one member voted for a reduction by 50 basis points.
He added that coast was unclear for monetary easing given the volatile global economic outlook among other domestic issues.
He said: "This question of reducing MPR, it's not just about where inflation is but about where we think it's going to be. We have serious concerns; there are two major concerns before us now.
"The fiscal position of government is a big problem. The deficit in the first half of this year is over N400 billion compared to just over N200 billion last year. Now we have drawn over N700 billion from the Excess Crude Account (ECA)."
Responding to questions over its financial report, the CBN governor said although the FRC had the duty to set accounting standards and international best practice, it does not approve the CBN accounts.
Sanusi said: "So we strongly support IFRS introduction, we strongly support building capacity in the industry for compliance. Again, for accounts, the FRC does not approve our accounts. The board of the central bank has approved the accounts. The FRC is there to set accounting standards to make sure that there are improvements that would meet international best practice.
"So if we publish accounts and FRC has comments on those accounts, they make those comments because they are regulators as far as preparing statement of accounts are concerned."
He said: "As banks respect our own regulatory arena, we respect FRC in its own regulatory arena but there's no question at all on a non-approval, and I am not even aware of any issues that have been raised.
"There's nothing like FRC not approving accounts, there's nothing like a query on our accounts and on our part, there's nothing like a complaint about FRC academy."
He further clarified the alleged controversies over banks' contributions to the International Financial Reporting Standard (IFRS) academy.
Sanusi said: "FRC did not force the banks, we were the ones who encouraged the banks to make the contributions. The CBN has been pushing for banks to move to IFRS and we are also aware that there's a dearth of skills around IFRS accounting.
"We encouraged the banks to make these contributions to the academy. These contributions are made to FRC and to the best of our knowledge, the money is still there and is going to be used for the purpose of the academy."
Source: ThisDayLive

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