Standing Deposit Facility: Banks Avoid Risky Lending, Lodge N19trn With CBN

Amid persistent liquidity pressures and credit risk aversion in Nigeria’s financial system, Deposit Money Banks (DMBs) have opted to dodge risky loans by lodging a staggering N19.3 trillion with the Central Bank of Nigeria (CBN) through its Standing Deposit Facility (SDF) window in the week ending February 20.

Data from the apex bank’s operations showed SDF placements peaked at N4.613 trillion on Monday, then tapered to N3.346 trillion on Tuesday, N2.958 trillion on Wednesday, and N2.973 trillion on Thursday.

By Friday, banks lodged N2.084 trillion, bringing the total weekly deposits to over N19 trillion.

This heavy recourse to the SDF persisted despite an improvement in overall system liquidity, with the banking system closing the week at a N2.0 trillion deficit—narrowing from the prior week’s N4.2 trillion shortfall.

Analysts attribute the sustained tightness and elevated daily SDF averages of N2.0 trillion to selective liquidity pockets, cautious interbank activity, and banks’ reluctance to extend credit amid high inflation, exchange rate volatility, and weak borrower quality.

On the funding side, the Open Repo Rate held steady at 22.5 per cent, while the Overnight rate eased slightly by seven basis points to 22.7 per cent, offering marginal relief in short-term conditions.

Meanwhile, strong investor appetite dominated the Nigerian Treasury Bills primary market auction, where a N1.2 trillion offer drew N4.3 trillion in subscriptions—a robust bid-to-offer ratio of 3.7 times. Demand skewed heavily toward the 364-day instrument (5.1 times oversubscribed with N4.0 trillion bids against N800 billion offered), while shorter tenors lagged at 0.7 times and 0.4 times.

Yields reflected this: the one-year stop rate plunged 108.7 basis points to 15.9 per cent, the 91-day eased to 15.8 per cent, and the 182-day held at 16.6 per cent. Secondary market yields across benchmark tenors fell 25 basis points to 17.4 per cent, led by long-term (down 50 bps) and short-term drops.

Analysts at Afrinvest West Africa link the softening yields to sustained demand for risk-free assets amid tight liquidity and positioning ahead of potential adjustments by the Monetary Policy Committee.

With rate cut expectations building, strong demand for government securities may continue pressuring yields downward, even as banks navigate constrained funding by prioritising SDF safety over lending.