As the naira begins to respond to the tightening measures put in place by the Central Bank of Nigeria (CBN) at its last Monetary Policy Committee meeting, members of the banking community have raised the alarm over the corresponding surge in lending rates which they said is not likely to abate anytime soon.
Last Wednesday, the naira closed at its firmest in two weeks, at N160.10 against the dollar from N161.70 the previous day although money market watchers said the rate was still just outside the central bank's 150-160 naira/dollar preferred trading band.
The CBN had tightened liquidity in the banking system by raising the Cash Reserve Ratio (CRR), from 8.0 per cent to 12.0 per cent, meaning that banks will now be left with less cash and, therefore, with less money to lend to their customers or play around with, in a measure that the apex bank governor, Mallam Sanusi Lamido Sanusi, said was to check rising inflation and protect the naira.
An indication that borrowers are in for a regime of higher lending rates among banks emerged last week when overnight lending rates soared 10 percentage points to a more than two-year high of 35 percent on Wednesday.
Overnight lending rate is the interest rate at which a depository institution lends immediately available funds to another depository institution overnight.
Fears were, however, expressed at the weekend that if the rate at which banks lend among themselves could be that high, then, it would be killing for individuals who come for loan.
Call rate rose to 31.933 percent, 7-day NIBOR rose by 31.9083 percent, 30-day NIBOR rose by 32.4167 per cent, 60-day NIBOR rose by 33.0750 per cent, while 90-NIBOR rose by 33.25 per cent.
According to the international financial advisory firm, Renaissance Capital, increasing the CRR will keep credit growth from strengthening and undermining new lending; particularly to the SMEs that the CBN has taken pains not to hurt with higher interest rates, which would be negative for GDP growth.
The firm recalled that the "MPC has opted not to hike the monetary policy rate (MPR) for fear of hurting growth - the committee was particularly concerned about hurting SMEs and putting upward pressure on non-performing loans (NPLs). While we think the policy measures taken will help stem naira weakness.
"We think the higher CRR is negative for growth as it will likely curtail new lending, particularly in an environment where liquidity has been particularly tight since May."
As the MPC already pointed out in the 24 July communiqué, significant liquidity on the books of banks has not led to intermediation and lending to the real economy. "Credit extended to the private sector grew by only 3.6% between December 2011 and June 2012, according to the CBN.
Sanusi said last month that interest rate cuts weren't the answer to spurring growth and would risk higher inflation.
He said Nigeria spends too much of its budget on government and should allocate more to development and to a savings buffer against the risks of lower oil output and weaker global demand.
As part of its bid to reduce naira liquidity, the CBN sold N172.06 billion ($1.1 billion) of treasury bills at an auction last week, with yields rising from a previous sale amid high subscription.
The CBN sold N32.06 billion of 91- day bills at a yield of 15.04 percent, 110 basis points more than at an auction July 25. It also sold N50 billion of 182-day securities at 16.56 percent, 162 basis points higher than the previous sale, and N90 billion of 364-day bills at 18.17 percent, a jump of 320 basis points. Bids totalled N172.06 billion.