BoG’s new Cash Reserve Ratio could stimulate circa GHS 50bn in new lending support to private sector
The recalibration of the Cash Reserve Ratio (CRR) of banks based on their Loan-Deposit (L/D) ratio by the Central Bank could stimulate some GHS 50 billion in new lending to the private sector, asserts GCB Capital Research.
According to the Central Bank, effective April this year, banks will be mandated to adhere to the following cash reserve ratios based on their respective loan-to-deposit ratios:
- Banks with a loan-to-deposit ratio exceeding 55% will be subjected to a currency Cash Reserve Ratio of 15%.
- For banks maintaining loan-to-deposit ratios ranging between 40% and 55%, a Cash Reserve Ratio of 20% will be enforced.
- Banks with loan-to-deposit ratios falling below 40% will face a more stringent requirement, with a Cash Reserve Ratio set at 25%.
The new CRR requirements, GCB Capital asserts, seek to galvanize loan book expansion of banks amid a backdrop of limited policy support for broader economic growth.
“With this directive, we believe the BoG aims to stimulate loan book expansion to support real sector growth, particularly given the austerity regime, which limits fiscal and monetary policy support for the below-trend growth. The BoG may also be limiting the cost of its Open Market Operations (OMO) with this new CRR directive while supporting its inflation objectives amidst the highly liquid interbank market conditions,” said GCB Capital.
The post-DDEP banking sector has been characterized by robust deposit growth with the updated banking sector data showing a 25.5% y/y growth in deposits in Feb-2024 to GHS224.4 bn (+GHS45.6 billion).
However, total loans and advances have been sluggish, growing by a paltry 1.77% y/y to GHS74.8 billion (+GHS1.3 billion).
In Nominal terms, private sector credit grew by 5% (+GHS3.3 bn) to GHS68.8 bn but contracted by 14.7% to GHS 331.1 mn in real terms.
Thus, the cash-rich banks have adopted a conservative credit stance, favouring the high-yielding T-bill and OMO Bill investments to credit creation as a strategy to preserve capital amidst declining asset quality in an uncertain operating environment.
Within the 1-year post-DDEP, banks have grown their investment portfolio with a chunk of their deposits, increasing their holding of T-bills and OMO Bills by 67.6% y/y (+GHS53.6 bn) at the close of Feb-24.
