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Liquidity crisis: How four banks borrowed N1.3trn in three months – Investigation

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Liquidity crisis: How four banks borrowed N1.3trn in three months – Investigation

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Against the backdrop of multiple challenges and crawling economic growth in the country, four commercial banks borrowed N1.300trn in the first quarter of 2021, FirstNews Online investigation has revealed.

This was 30 percent increase from the N1.228trn, which the banks collectively borrowed within the same period last year.

A detailed analysis of the bank’s financial statement revealed that the current liquidity pressure was coming from the Naira back-up for foreign exchange demands, as the banks now rely heavily on the apex bank for liquidity support.

Indications also emerged from the CBN’s economic report this year showing that banks’ average monthly borrowing, through its Standing Lending Facilities, jumped by over 100 per cent.

Commercial banks use the CBN’s SLF to support liquidity shortfalls and meet trading obligations on short-term basis, while keeping excess cash with the apex bank in the Standing Deposit Facilities, which is also on short-term basis.

According to the CBN economic report, which is designed for the dissemination of financial and economic information, especially on the developments in the real and external sectors of the economy, as well as international economic issues of interest, the apex bank’s window at the end of June 2020 indicated higher patronage at the SLF window, than its SDF counterpart.

For instance, at the end of July 2020, the interbank money market had been bedevilled by constant shortage of funds, since the apex bank commenced a bullish intervention in the foreign exchange market two months earlier, to address the depreciation of the naira in the parallel market.

WHAT BANKS BORROWED IN Q1 2021
The four banks involved in the borrowing of the N1.300trn in the first quarter of this year are: United Bank for Africa Plc, GTBank Plc, Fidelity Bank Plc and FCMB Plc.

Analysis of the bank’s first quarter 2021 financial results showed that UBA borrowed a total of N707, 367 billion in the first quarter ended March 2021, against the N694, 355billion it recorded during the comparable period of 2020.

Fidelity Bank followed with N299, 750billion borrowing in the three months ended March 2021, against the N260, 971billion, which the bank borrowed last year. Others are FCMB, which borrowed N171, 396 billion in the three months of 2021, away from N159, 718 billion which the bank borrowed during the review period of 2020, while GTBank borrowed N121, 702 billion in the first quarter of 2021, increasing from the N113, 895 billion the bank borrowed during the same period in 2020.

ANALYSTS’ POSITION
An economist, Mr Ademola Adegbenro, said that banks were depending on the apex bank loans to meet their cash obligations, following the lack of liquidity in the banking system.

He explained that banks access the SLF to borrow from the CBN while they access the SDF to place deposit with the apex bank.

He said, “These banks don’t mind. They think that the dollar will appreciate better than it does; they were all betting against the naira.

“Although in an environment like this, it is better to be a borrower, because you will pay with cheaper naira in the long run. I also think it is pretty obvious that the naira will depreciate further.”

Managing Director, Financial Derivatives Company, Mr. Bismarck Rewane, said the scarcity of funds sometimes leads to naira appreciation and decline in prices.

“Every time you sell dollars to the banks, you take naira away from them. The banks will rather stay in dollar than stay in naira, so they borrow naira. That is what is happening; they are all short on naira and long on dollars,” he said.

Rewane noted that urgent implementation of the 2021 budget would provide some liquidity relief to the system.

“First and foremost, N4.37trillion, which was 32 per cent of total expenditure and 62.9 per cent higher than the 2020 budget,” he said.

An investment banker and financial analyst, Dr Charles Omene, argued that the system would however, be corrected so that banks would not have to borrow much from the apex bank, and hence pay less interest rate.

“The system will correct itself because at that time, the naira will appreciate and there will be more naira available for the government and it will reduce the Treasury bill,” he said.

Meanwhile, to curb the abuse of access to the CBN Standing Lending Facility by financial institutions, the apex bank said it had become imperative that some measures be taken to redress the trend and redefine the mode of operation by authorised dealers at the window.

Reacting, Chairman and Managing Director of DAS Energy Services, Udu in Delta State, Chief Sunny Onuesoke, warned that the new foreign exchange measures introduced by the CBN would rather crash the Naira further instead of salvaging it.

Onuesoke, who spoke to journalists at Asaba, Delta State on Friday, said the problem with the new exchange rate policy was that it was designed for the elite with government connections.

He maintained that the government does not truly have the foreign reserve, or the economic prudence to realistically defend the naira and so its half measures were making a bad situation worse by creating two exchange rates.

He said, “One is for highly placed Nigerians, government lackeys and the other for everyone else. The official rate is not backed by any known economic principles. It is simply arbitrarily chosen

“This rate cannot be sustained and made accessible to everyone who needs foreign exchange. Because of this, there is a flow over to the so called black market, where the rate is determined by market principles of demand and supply.”

He, however, warned that the racketeers might hijack the CBN’s gesture and that it was not sustainable, just as he observed that those applying for Foreign Exchange for PTA might be doing so for the arbitrage.

He advised that if the government stops subsidising the elite, the value of the Naira would initially plummet until the market finally stabilises and the free market forces take over, adding that the rise and fall of the naira would be determined by how well or how bad the economy is being managed.