Amid liquidity crunch in the banking sector,Deposit Money Bank (DBMs) and merchant banks borrowing Central Bank of Nigeria (CBN) increased to N7.5trillion in the first 5 months of 2023, an increase of 276 per cent from N1.99 trillion reported in the first five months of 2022.

Data from the CBN showed that DMBs and merchant banks borrowing through the Standing Lending Facility (SLF) witnessed significant increase as banks grappled with the fallout from the new naira notes policy in 2022, among other factors.

Analysis of CBN numbers showed that DMBs and merchant banks’ borrowings from the CBN surged by 276 per cent Year on Year (YoY), signalling that they faced a liquidity squeeze during the period as the country’s demonetisation drive triggered chronic cash shortages.

A senior manager in a top tier-2 bank disclosed to THISDAY of CBN’s aggressive liquidity mop-up through Cash Reserve Ratio (CRR).

The CBN lends money to DMBs and merchant banks through the SLF at interest rate of 100 basis points above the Monetary Policy Rate (MPR).

Standing facilities (lending and deposit) are instruments of liquidity management, according to the CBN. They serve as avenues to invest surplus funds overnight and to square up whenever the system is short at the end of each business day.

The apex banking regulating body hasSLF, a short-term lending window for DMBs and merchant banks to access liquidity to run their day-to-day business operations.

The CBN had on October 26, 2022 announced that the N200, N500 and N1,000 notes would be redesigned and introduced into the economyfrom December 15, 2022 while DMBs were directed to return existing denominations to the CBN.

The Governor, CBN, Godwin Emefiele at the first Monetary Policy Committee (MPC) in 2023 had said money market rates oscillated below and within the asymmetric corridor of the standing facilities window, reflecting changing liquidity conditions in the banking system.

According to him, “The CBN has been aggressive in its intervention in the first two months of 2023. The CBN’s CRR debits has increased significantly this year when compared to last year. DMBs always visit the SLF window when CBN debit them CRR every two weeks.”

Analysts attributes the increase in SLF to cash scarcity, stressing that DMBs and merchant banks were no longer enjoying the usual cash depositsthat normally come from businesses and individuals that generate significant amount of cash from relationship with various third parties.

“Economy has suffered so much from the problem created by CBN’s mismanagement of currency redesign program and deliberate cash scarcity. A program that was expected to be positive suddenly turned negative because CBN did not understand the dynamics of deliberate cash scarcity as an unusual monetary management tool, ”the Chief Executive officer, Wyoming Capital and Partners, Mr. Tajudeen Olayinka stated.

According to Olayinka, “The most significant factor is the increasing level of threat in the environment of business in Nigeria, arising from: insecurity, supply chain problems, rising inflation, and poor purchasing power,low level of productivity, rising unemployment, liquidity overhang and paucity of risk-free financial instruments.”

He added that, “As a result, most banks prefer to be debited by CBN for running short of LDR limit, as against extending credit to businesses that are finding it difficult to survive. It is all about managing risk.”

“When CBN mop-up liquidity, DMBs will first resort to the intervention before they build capacity again. With the increasing inflation rate, the CRR debit is a means to reduce banks ability to extend access cash into the system and control the volume of money in circulation.

“This policy in the short run reduces the amount of profits DMBs can make from excess credit extension and ensure DMBs will always have the right amount of cashand not fall short of funds when depositors require funds for their personal needs, ”another analyst who does not want his name in print added.

On his part, the Vice President, Highcap Securities Limited, Mr. David Adnori attributed increasing DMBS borrowing from CBN to demand from customers.

According to him, “It could be that some DMBs are over-stressed and they needed money to meet existing obligations. These could have been the two major reason DMBs increase borrowing from CBN.”

Adnori stated that thenaira design policy and political tension had forced DMBs and merchant banks to deposit with the CBN at an attractive interest rate amid a hike in MPR.

Meanwhile, THISDAY investigation revealed that DMBs and merchant banks deposit with the CBN spiked during the period amid political uncertainties in the country.

In the period under review, deposit with CBN stood at N2.1 trillion, representing 5.4 per cent YoY increase from N1.99 trillion in the corresponding period of 2022.(THISDAY)