Nigerian industries and the agricultural sector is expected to suffer from fiscal setbacks following the new financial trend of excessive borrowing by commercial banks from the Central Bank of Nigeria (CBN).
This week, MMS Plus continued to reached out to key players in the finance sector and economic experts to unravel why Deposit Money Banks (DMB) and merchant banks borrowing from the CBN increased to N4.4trillion between January and April 2021. An increase by over 90% when compared to the 2.3trillion borrowed in the same period in 2020. While, there has also been a decline in their deposits at CBN by 27% from January to April.
Speaking with the Chairman, Ports Consultative Council (PCC), Otunba Kunle Folarin posited that such borrowings by banks from CBN would be at the detriment of other key sectors.
Otunba noted that CBN would either have to move money that was supposedly meant for Agricultural sector or Industrial development to the finance sector.
According to him, the fiscal environment for transaction last year was quite different compared to this year as Covid-19 played a critical role in banks’ borrowings.
His words: “DBMs do not have people move money into their accounts last year because there was no business and little or no transactions took place. Also when the economy jump-start about the fourth quarter of last year till now, a lot of banking transactions took place at the same time with borrowings but where is the capital to sustain the new business opportunities? There is so much pressure on DBMs now than before which means that banks must look for money from CBN and investors overseas to satisfy the demands of their customers and sustain the banking system from collapsing”
Meanwhile, a pension manager in leading commercial bank who preferred anonymity argued that tge rise in CBN’s loan to DMBs is hinged on government policy and a umber of irregularities in the finance sector leading to high interest rates.
“The government may at any point choose to subsidize a particular sector for the reason of national development. Petroleum sector was subsidized at some point but currently it’s the Agricultural sector. This, therefore, means that only a few businesses into agriculture compared to the ratio of those seeking loans will get it. To players in other sectors, loans will be difficult to access as these banks pay them less attention. It is pertinent to note that because these banks get some sort of incentives from the government in granting sectors that are considered as key to the economy, they will most likely restrict granting loans to players in these identified sectors.”
“Also most of the loans goes underground back to the government across different levels to meet overhead cost. You may hear that CBN releases credit facility to bank to make them liquid but underground, the money is loaned back to the government. Beyond the fact that everything is shrouded in secrecy, the detrimental factor about this phenomenon is that it doesn’t make any economic sense to borrow for overhead cost because they keep increasing your deficit with little or no capital projects that can create jobs executed,” he said.
For the Chief Executive Officer (CEO), Quiet Dimensions Limited, Mr. Ime Udoma, he said that the reasons CBN give loans to banks is to lift the banks’ short term liquidity gap.
His words: “If a bank is going beyond it’s required minimum threshold it has to run to CBN to borrow and cover that position. They also have a choice to borrow from a fellow commercial bank. Before the pandemic when the economy was still good, the usual practice was to go to money market.”
Udoma also stated that State government borrow a lot from DBMs, but however don’t pay back in cash.
“When a bank borrows a non real sector money, it’s the real sector of the economy the bank would engaged in trading and generate money back to the bank before the cash is transferred to CBN to cover their position.” he said.
He added that CNB’s effort to control inflation would have to tighten it’s monetary policy which allows the banks to borrow in other to be viable.
“Once a bank’s required reserve ratio falls beyond threshold, they’re thrown out of a credit and once you’re out of credit for one night, it’ll be a signal to anyone using that bank and they’ll come and asking for their money.
“The effect of covid also crippled the world economy and Nigeria is not living in isolation so that economic factor can’t be ruled out.” Udoma said.
Experts also posit that some commercial banks might run into crisis if the current trend continues and CBN has to deploy smart approaches to guarantee sustainable banking.