The Central Bank of Nigeria (CBN) has refunded N189.9billion Cash Reserve Requirement (CRR) balances to 24 Deposit Money Banks (DMBs), thus injecting lendable funds into the system.
The effect of the inflow, which hit the accounts of all the 24 banks around 6pm on Wednesday, could, however, not be felt immediately as they had concluded their transactions.
But yesterday, the N189.9billion CRR inflow failed to calm the market as interest rate remained high because banks intentionally refused to use the funds because they were not sure of how the new CRR regime would work.
At the close of work, Call Money (short-term funds banks borrow from one another to meet their pressing demands), remained unchanged at 10 per cent per annum. The overnight unsecured lending rate that was formerly at 9.9 per cent closed flat at 9.9per cent.
Banks obviously refused to touch the inflow because of the need to maintain a daily average of funds in their operating accounts equal to the CRR requirement (2 per cent of deposits).
CBN’s spokesman Mohammed Abdulahi confirmed the refund of the CRR balances to banks, but said he was not sure of the total value.
He, however, noted that at the last Bankers’ Committee meeting, CBN Governor Sanusi Lamido Sanusi promised to refund to banks the balances in their CRR.
Information from the money market yesterday noted that the total amount credited banks by the banking watchdog was about N200billion.
The apex bank had last week modified the CRR by introducing reserve averaging, which permits banks to ensure daily average in their CRR that will be in their operational accounts at least in every four or five weeks. It allows banks spread the funds that should ordinarily be in CRR account, until the four or five weeks period.
The new CRR regime is expected to stop the volatility associated with interest rate after the inflow of the monthly statutory allocation has dried up.
CRR (or cash reserve ratio) is a CBN regulation that sets the minimum reserves each commercial bank must hold (rather than lend out) of customer deposits and notes. It is normally in the form of cash stored physically in a bank vault (vault cash) or deposits made with a CBN.
The reserve ratio is sometimes used as a tool in the monetary policy, influencing the country’s borrowing and interest rates by changing the amount of loans available. Western Central Banks rarely alter the reserve requirements because it would cause immediate liquidity problems for banks with low excess reserves; they generally prefer to use open market operations (buying and selling government-issued bonds) to implement their monetary policy.
CBN Acting Director, Financial Policy and Regulation Department, C. O. Chukwu, had in a circular to all banks said the implementation of the framework will be from last Wednesday till April 5.
He said the framework requires that on February 9, 2011 to Tuesday March 8, 2011, balances in banks’ CRR accounts will be transferred to their accounts, and the CRR accounts will be immediately closed. From that date, the CRR for the first maintenance period will be calculated for 28 days immediately prior to the first maintenance period.
The apex bank director said the new framework stipulates that at the beginning of each maintenance period, banks will be advised of their CRR, based on a simple average of their daily deposit liabilities at the time as well as applicable ratio set by the regulator. However, domiciliary or foreign currency balances of the computational period are excluded. "A bank will have complied with the CRR if its daily average balances in its operating accounts at the CBN throughout the maintenance period, are equal to, or greater than the CRR as computed by the CBN," the apex bank said in a statement.
Chukwu said the computational and the maintenance periods for the requirement are increased from two weeks, to four or five weeks, depending on the expected timing of key government transactions.
But by the close of business yesterday, the N189.9billion CRR inflow failed to calm the market as interest rate remained high. The banking watchdog had last week modified the CRR by introducing reserve averaging, which permits banks to ensure daily average in their CRR that will be in their operational accounts at least in every four or five weeks. It allows banks spread the funds that should ordinarily be in CRR account until the four or five-week period.
"The computational and maintenance periods will start on a Wednesday and finish on a Tuesday (holidays permitting) and will be announced at least two periods in advance by the regulator," he said. Part of the new rule remains that a maintenance period will be for the same period as the computational period for which the CRR is calculated for the subsequent maintenance period.
For banks that fail to comply with the new rule, the CBN said it may from time to time, consistent with its monetary policy stance, remunerate the balances held by banks in excess of the requirement.
"A bank that has not maintained the required average balance in its operational accounts over the maintenance period will be considered non-compliant with the CRR and will incur a penalty," he said.
The penalty will be calculated by multiplying the average daily deficit by the penalty interest rate by the number of days in the maintenance period divided by 365. Where a bank has complied with its CRR in the three immediate prior maintenance periods, the penalty interest rate according to the banking watchdog, will be two and a half times the rate applicable on the Standing Lending Facility (SLF), otherwise it will be five times the rate applicable on the SLF.
The apex bank said that penalties, when applicable, will be automatically charged against a bank’s operational account at the CBN not later than three days after the end of the maintenance period.
The CRR (or cash reserve ratio) is a central bank regulation that sets the minimum reserves (in cash) that each commercial bank must hold (rather than lend out) of customer deposits and notes. The CRR funds are kept in an escrow account with the CBN.
The reserve ratio is sometimes used as a tool in the monetary policy, influencing the country’s borrowing and interest rates by changing the amount of lendable funds available. Western central banks rarely alter the reserve requirements because it would cause immediate liquidity problems for banks with low excess reserves; they generally prefer to use open market operations (buying and
selling government-issued bonds) to implement their monetary policy. The People’s Bank of China uses changes in reserve requirements as an inflation-fighting tool, and raised the reserve requirement nine times in 2007.
As of 2006 the required reserve ratio in the United States was 10 per cent on transaction deposits and zero on time deposits and all other deposits. An institution that holds reserves in excess of the required amount is said to hold excess reserves.
CBN Acting Director, Financial Policy and Regulation Department, C. O. Chukwu, had in a circular to all banks said the implementation of the framework will commence on March 9,2011 with the immediate transfer of balances in banks’ CRR accounts closure of the old CRR accounts. From that date, the CRR for the first maintenance period will be calculated for the period 28 days immediately
prior to the first maintenance period (i.e. the period February 9 to March 8). This period is called the computational period and precedes its corresponding maintenance period.
The apex bank director said the new framework stipulates that at the beginning of each maintenance period, banks will be advised of their CRR, based on a simple average of their daily deposit liabilities during the last computational period as well as applicable ratio set by the regulator (currently 2%). However, domiciliary or foreign currency balances of the computational period are excluded. "A bank will have complied with the CRR if its daily average balances in its operating accounts at the CBN throughout the maintenance period, are equal to, or greater than the CRR as
computed by the CBN," the apex bank said in a statement.
Chukwu said the computational and the maintenance periods for the requirement are increased from two weeks, to four or five weeks, depending on the expected timing of key government transactions.
"The computational and maintenance periods will start on a Wednesday and finish on a Tuesday (holidays permitting) and will be announced at least two periods in advance by the regulator," he said. Part of the new rule remains that a maintenance period will be for the same period as the computational period for which the CRR is calculated for the subsequent maintenance period.
The CRR funds will be non-interest earning, however, the CBN said it may from time to time, consistent with its monetary policy stance; remunerate the balances held by banks in excess of the requirement.
"A bank that has not maintained the required average balance in its operational accounts over the maintenance period will be considered non-compliant with the CRR and will incur a penalty," he said.
The penalty will be calculated by multiplying the average daily deficit by the penalty interest rate by the number of days in the maintenance period divided by 365. Where a bank has complied with its CRR in the three immediate prior maintenance periods, the penalty interest rate according to the banking watchdog, will be two and a half times the rate applicable on the Standing Lending Facility (SLF), otherwise it will be five times the rate applicable on the SLF. The SLF rate is currently 8.5 per cent and the penalties are therefore 21.25 per cent and 42.5 per cent respectively.
The apex bank said that penalties, when applicable, will be automatically charged against a bank’s operational account at the CBN not later than three days after the end of the maintenance period.
The Nation
Advertise on NigerianEye.com to reach thousands of our daily users
No comments
Post a Comment
Kindly drop a comment below.
(Comments are moderated. Clean comments will be approved immediately)
Advert Enquires - Reach out to us at NigerianEye@gmail.com