By Babajide Komolafe
Banks are now battling withÂ money deposited by customers in their vaults which they are either not ready to give out as loans or nobody is coming forward to take. This is a fall out of the over N400 billion in the system more than the banks needed to hold in cash, which has brought the need for banks to lend to each otherÂ in the interbank money market to zero level.
“There is money everywhere in the market, nobody is taking money”, said a senior bank treasurer
“Four banks that used to take (borrow) money in the market, Intercontinental Bank, Spring Bank, Finbank and Oceanic Bank no longer takes money. So there is nobody to lend to and that is why the market is completely down now.â€
“And you know we are not lending too because there are no good borrowers to lend to.Â Everybody is being careful now. The situation is frustrating because we can not make profit with the money just sitting idle,” he said.
Another senior treasurer said, “There is lots of un_used moneyÂ in every bank with some banks having N60billion to N70 billion unused funds in the treasury”.
“The problem is there is so much money in the system but no securities or outlets to invest these funds. And that is why everybody is pursuing bonds”, he said
Most of the bank treasurers expressed frustration over the scarcity of investment outlets to channel the excess funds in the system.Â And to ameliorate the situation most of them have been buying FGN bonds or deposit their idle funds with the Central Bank of Nigeria (CBN) through its Standing Deposit Facility (SDF).
A CBN source told Vanguard that now instead of the CBN giving money to support banks through the expanded discount window they now put their money in the CBN vault through the Standing Deposit Facility (SDL) which bankers say has indeed been heavily patronised by the banks in recent times. According to the source, the banks seem to prefer keeping money with the CBN at 2.0 per cent interest instead of lending to the economy.
This, the source said, is becoming a source of worry to the apex bank as the development does not augur well for the growth of the economy which the federal government it its 2010 budget projected to grow by 6 per cent. Reflecting the desperation of banks to channel their idle funds into any available risk free investment outlets, prices of FGN bonds have risen sharply to what a bond dealer called “unprecedented level”. “I saw the price of a bond moving by N5 in one day for the first time. I don’t know how long we can sustain this”, the bond dealer said.
For example, last week, the price of 6th FGN series 5 bond rose by N4.6 to N173.70 from N169.10 the previous week. Also the price of 6th FGN series 3 bond rose by N3.85 to N140.45 from N136.6, while the 6th FGN series four bond rose by N3.15 to N98.65 from N95.5.
Accompanying these increases are declines in the yields on the bonds. “The impact of the liquidity in the system has been intense which has led to decline in yields by about 300 basis points across board from January to date”, said a bond dealer with one of the banks that has South African links.
“The prices are driven by demand fuelled by the excess liquidity in the system”, said Head of the Bond unit of one of the big banks. Responding to the basis for the unprecedented increase in bond prices, he said, “It is a function of demand. People are buying it because it is still better than putting money in CBN at 2.0 per cent. Also, the volume of some stocks (FGN bonds) in the market is small especially compared with the liquidity in the market”. He said.
This scenario was confirmed by the results of the FGN bonds offered by the Debt Management office (DMO) last week, which recorded 163 per cent over-subscription for theÂ Â N75 billion worth of bonds offered by the DMO.
Vanguard investigations revealed that the excess liquidity in the system started with the N620 billion bailout fund the CBN injected into the eight rescued banks last year. In addition to this was the credit freeze as well as the debt recovery efforts of banks and the monthly statutory allocation funds. Meanwhile the apex bank, in an attempt to ameliorate the effects of the banking reforms slowed down its liquidity mop activities through treasury bills.
This has resulted to unprecedented money in circulation in the economy, which has pushed down and kept the rate at which banks lend to one another (inter bank interest rate) to unprecedented low levels, between three per cent and two per cent since December.
The situation was aggravated last week with the release of N329 billion statutory funds, and about N300 billion from the excess crude oil account. Sources at the Financial Market Dealers Association of Nigeria (FMDA) told Vanguard that, “By the time the full impact of these inflows hit the market this week, we would be talking about excess liquidity of N500 billion.