The Cash Reserve Requirement (CRR) is the proportion of customer deposits that banks must hold in zero percent interest-yielding assets of the Central Bank. The commercial is expected to fund its positions to the extent of the stipulated CRR limits or risk being debited. While the CRR currently stands at 32.5% (following an unexpected 500bp upward adjustment from 27.5% in September), the effective CRR would rise to about 60% of deposits if the discretionary CRR is considered. But what is the discretionary CRR?
While the CRR debit on the face of it is meant to be a mandatory 32.5% (previously 27.5%) deduction on the deposits of banks, the CBN has since introduced another twist to the discussion, namely the Real Sector Support Facility-Discretionary Cash Reserve Ratio (RSSF-DCRR) which is meant to fund the CBN’s Development Finance Initiatives.
Experts say that the CBN also made recourse to discretionary CRR debits to curtail liquidity after the OMO issuance alternative became too expensive for Apex Bank. The CBN in 2019 paid up to N1trn in interest payments on OMO bills. The CRR deductions would usually occur days before FX Auctions. By reducing the Naira balances of banks, the CBN intends to reduce the demand for FX by the banks.
The recent round of CRR debits in September 2022 saw the CBN hammer banks in breach of the CRR rule with a total of N118bn debit. The hardest hit was Stanbic IBTC and GT Bank (N15bn each). Before now, the most affected were UBA and Zenith Bank. Using their Net Interest Margin and the total debits made by the CBN, the two banks (UBA and Zenith Bank) lose up to N2.9bn and N3.8bn respectively. The discretionary CRR debits of the CBN also raise the question of NDIC premiums charged on sterilized funds. The NDIC uses a combination of qualitative and quantitative factors to determine the premium to be paid by respective banks. This, however, does not consider the fact that the CBN has, by way of its CRR charges, sterilized a part of the bank’s deposit. Stakeholders argue that the portion of the deposits lodged with CBN should not be assessable for NDIC deposit premium
