By Babajide Komolafe
The banking industry on the whole suffered a total of N 95 billion declines in deposit in the month of March alone prompting the Central Bank of Nigeria (CBN) to return N951 million cash reserve requirement (CRR) credit to banks last week. This contrast with the N130 billion increase in deposit and N1.3 billion CRR debitÂ experienced by the industry in February.
Last week Vanguard reported that depositors are withdrawing their deposits and investing same in bonds and other money market instruments in Ghana and other neighbouring countries though the monetary authorities will want Nigerians to believe otherwise.
Meanwhile, the fall in deposit rates in the industry assumed a new dimension last week as some banks have started crashing interest rate on existing fixed deposits.
The CRR is the portion of total deposits banks are required to keep in liquid cash and is at present one per cent for banks in Nigeria. Consequently, the CBN at the end of every month calculates the increase or decrease in the deposit of banks and debit or credit them accordingly. This means if the deposit of a bank increases by N100 billion, the CBN will debit the account of the bank for one per cent of this increase i.e. N1 billion. But if the deposit of the bank reduces by N100 billion, the apex bank will credit the account of the bank by N1 billion.
Vanguard investigations revealed that last week Friday the CBN credited banks with N951 million, which is one per cent of N95 billion. This implies that on the average the banking industry suffered N95 billion declines in deposit.
This is the first time since second quarter of 2009 that the industry would experience a CRR credit and hence decline in deposit. In February the industry experienced CRR debit of N1.3 billion indicating that banks deposit grew by N130 billion. In January the industry experienced CRR debit of N1.48 billion indicating a N 148 billion growths in banksâ€™ deposits during the month.
The decline in banksâ€™ deposit is occasioned to the sharp decline in deposit rates in the industry a development triggered by the over N600 billion idle funds in the industry.
Interest rates on time deposits which ranged from 8.0 per cent to 14 per cent in last quarter of 2009 had crashed to 3.0 per cent in March. The result is that banksâ€™ deposits have become less attractive in terms of returns compared to other investment options hence depositors are withdrawing their funds from banks and investing in the stock market or giving it to finance companies or taking it out of the country to neighbouring West African countries where deposit rates hover around 14 per cent.
Meanwhile, in an apparent bid to cut down losses on existing fixed deposits entered into when interest rates were high, some banks have reviewed downward interest rate on such deposits.
Vanguard investigations revealed that some banks have notified that due to the general fall in interest rate that they have to review downward the interest rate on their existing deposits.
In fact one of the big banks, with presence in 16 African countries wrote to its customers last week that though their deposits mature end of this month, it has reviewed the interest rate to three per cent with immediate effective.
In a letter to some of its customers the bank stated, â€œDue to prevailing money market conditions, we are constrained to inform you that effective immediately, both call and fixed time deposit rates have been reviewed downwards.
From our records, your investment sum is at the rate of 11 per cent p.a for 90days. The maturity date for this amount is April 28, 2010.Â In view of current market reality, the investment will still mature at the due date but will effective immediately, run at 3 per cent p.a.
Please note that the prevalent rate would apply for subsequent roll over and fresh deposits. We regret any inconveniences these changes may have caused you and count on your continued support.â€
An official of the banks explained to customers, â€œThe challenge here is that all banks have taken the same stance, we are thus reaching out to all customer via letters, mails, sms etc so if anyone feels they cannot continue, then they can take the funds, donâ€™t forget that the global agreement forms capture bankâ€™s prerogative to review rates but with notification to the customer. We even held out for as long as we could but itâ€™s taking effect from April 1″
Although this amounts to breach of contract, bankers who spoke to Vanguard said that contracts can be revoked adding that the most important thing is that the customer was informed about the decision of the bank and he is free to either discontinue the investment or continue it.
The banks it was gathered are incurring significant losses on existing deposits and to ameliorate the situation they had to review downward the interest rates. Most of the deposits were booked at interest rate between 10 and 14 per cent but the excess liquidity in the system coupled with banksâ€™ unwillingness to lend (credit freeze) prompted a fall in interest rates to an average of 3.0 per cent.
A recent survey of banksâ€™ deposit rates by Vanguard showed that the average deposit rate for 30 days term deposits of below N100 million is about four per cent. Though some banks still pay up to 4.5 per cent, other banks pay between 1.25 per cent and 3.5 per cent. Previously, especially prior to the ongoing baking reforms deposit rates hovered between 10 per cent and 14 per cent.
The implication of this to th economy is that with banks are reducing lending activities to lowest levelÂ and with over N600 billion idle funds in the system, keeping existing deposits atÂ the initial interest rate translates to serious loses for the banks. With banks not lending, companies can not undertake new invest, expand existing facilities and major business decisions are on hold. If this trend continues, there will no new job created, companies may have to lay off more staff and the government cream of the economy growing by 5 per cent in 2010 will be a mirage.
While the decision of the banks to review rates on existing deposit investment is unfair, Investigation revealed that they were motivated by the fact that even if customers decide to withdraw their deposits, they can notÂ get a higher rate elsewhere more so that banks no longer emphasis deposit takings.
It was gathered that some of the banks had mulled the decision since the beginning of the year but were constrained by the likely consequence. But with increasing negative interest margin the banks have no choice but to review the interest rate as a survival strategy.
In addition to this was the fact that the possibility of the depositors rolling over their investment upon expiration is low. Proponents of the down ward review of interest rate on existing investments.
argued that industry trend indicates shift in preference from term banksâ€™ deposit to other investment which offer higher returnsÂ Â like equities, bonds and finance companies.