Nigeria: CBN’s Reversal on Daily CRR Deductions Brings Relief to Banks

In a significant move that is being hailed as a positive development for banks, the Central Bank of Nigeria (CBN) has reverted to its previous method of calculating and deducting the Cash Reserve Requirement (CRR), potentially leading to an expansion of banks’ loan portfolios.

The CBN issued a circular titled “Cash Reserve Requirement Framework Implementation Guideline,” signed by Dr. Adetona Adedeji, the Acting Director of the Banking Supervision Department. According to the circular, the CBN is discontinuing daily CRR debits and adopting an updated CRR mechanism to enhance banks’ planning, monitoring, and alignment of records with the CBN.

CRR is a percentage of a bank’s total deposits that it must maintain as cash reserves with the central bank, serving as a tool for controlling money supply and influencing inflation and liquidity levels. The CBN, in its circular, disclosed that it will no longer debit the entire CRR daily, introducing a more incremental approach.

Under the new process, the circular states, “the extant ratio (32.5%) will be applied to increases in the banks’ weekly average adjusted deposits.” This implies that only the increment in deposits will be subject to sterilization after CRR has been debited.

Furthermore, the circular outlined that a CRR levy of 50% of the lending shortfall will be enforced for banks failing to meet the minimum Loan to Deposit Ratio (LDR), set at 65%. The LDR represents the proportion of a bank’s total loans to its total deposits.

President of the Nigerian Economic Society, Professor Adeola Adenikinju, highlighted that this move marks a return to the previous dynamic CRR (DCRR), designed to encourage banks to focus more on lending than on other financial instruments. The circular is seen as a positive development for banks, offering more clarity and predictability in planning their portfolios.

Ayokunle Olubunmi, Head of Financial Institutions Ratings at Agusto & Co, praised the decision, stating that it is excellent news for banks. He emphasized that the new approach would provide banks with the ability to plan more effectively, especially in estimating CRR deductions, which will now be done weekly instead of daily.

The circular is expected to contribute to an increase in the industry’s loan books, as banks strive to avoid penalties associated with not meeting the LDR. While the circular provides more clarity, questions remain about the potential refund of excess CRR and how the CBN will address situations where deposits decrease rather than increase.