Thisday||The Bank Directors Association of Nigeria (BDAN) has expressed dissatisfaction over the decision of the Central Bank of Nigeria (CBN) to increase the Cash Reserve Ratio (CRR) on public sector deposit from 50 per cent to 75 per cent.
The association argued that raising the CRR by 25 per cent just six months after it was increased from 12 per cent to 50 per cent would adversely affect the banking sector and the economy.
According to last week pronouncement by the CBN Governor, Mallam Sanusi Lamido Sanusi there is the possibility of further tightening monetary conditions as the Monetary Policy Committee (MPC), which he chairs is not comfortable with the revenue leakages, declining external reserves as well as headwinds from the global market.
Specifically, Sanusi indicated that the CRR on private sector deposits may be raised to 15 per cent, from 12 per cent, while the CRR on public sector deposits may be increased to 100 per cent which would imply a total withdrawal of public sector funds in banks.
But BDAN noted that the policy would weaken the ability of banks to lend to economic agents and thus slow down the robust growth rate the country has enjoyed in the past few years. The association maintained that as the economy slows down, the poverty rate and incidents of social upheavals, which have constituted serious hindrance to national development, could worsen.
“Since banks do not have much liquidity to lend, they will increase interest rates. Two consequences could naturally evolve from this. The first possibility is that many people will shun bank loans because they cannot afford it, while those who bear the excessive cost of funds will pass it to consumers of their products and services.
“These will reduce the productive capacity of the economy in favour of short term high margin trading, which is not in the interest of the country.”
BDAN also lamented that the policy would reduce returns on capital investment in banks. It argued that weak lending would translate to lower incomes, noting that some banks could consider staff downsizing to mitigate the impacts.
“Unfortunately, the squeezing comes when the economy is crying for interventionist programmes that could make funds available for the real sector. With the mop up, the already credit-dried economy faces harsher funding environment,” BDAN noted.