Lenders borrowed Sh28bn on Imperial Bank fall, says CBK
Imperial Bank customers ponder their next move after the lender was closed in October. PHOTO | FILE
Liquidity distress triggered by the collapse of Imperial Bank forced commercial banks to borrow Sh28 billion at punitive rates from the regulator in the month of October 2015 and discount billions in government securities to meet cash demands, Central Bank of Kenya (CBK) has now disclosed.
Banks borrowed the amount through the overnight window and sold government securities valued at Sh64 billion at a loss to ease the liquidity crunch, shows data from the Financial Sector Stability Report published by the CBK.
Lenders made 33 requests to the regulator to extend operating hours of the daily cash settlement window referred to as Kenya Electronic Payment and Settlement System (KEPSS) in October as the lenders did not have enough money to swiftly pay their obligations.
“To enable commercial banks meet their obligations in KEPSS, extension of operating windows is granted upon request. The liquidity strain experienced saw October record the highest operating windows extensions,” said CBK in the report.
Average number of requests a month is normally below 10 with July having recorded the second highest number of extensions at seven.
Commercial banks have to daily settle payments made by their clients through channels such as cheques and electronic transfers to other banks.
If a bank does not have enough cash to honour its customers’ commitments it has the options of borrowing from its peers through the interbank window or from the CBK as the lender of last resort.
The CBK issued 27,806 overnight loans in the month of October which was the highest volume in the last two years.
Overnight loans are deliberately expensive to avoid banks misusing the window. The upsurge in use indicates the pain banks were undergoing during the tumultuous period that followed closure of the dodgy bank.
The sudden closure shocked the market resulting in depositors shying away from small and medium sized lenders in an effort to lower exposure.
Banks also stopped lending each other through the interbank market, which is unsecured, turning to horizontal repos. Horizontal repos are used to borrow between banks with the borrower using Treasury bills and bonds in its books as collateral.
Some lenders were forced to sell back their government securities to the Central Bank at a loss, in a process known as rediscounting, so as to raise cash and ease the liquidity crunch.
Banks rediscounted bills and bonds worth Sh64 billion last year after going for two years without such a fire sale.
Lenders can sell their bills and bonds on the Nairobi Securities Exchange, a secondary market, but this can take time as a willing buyer has to be found to take the securities off their hands.
“Secondary market for the treasuries was almost non-existent due to fear among investors of making huge losses associated with high interest rates,” said the CBK.
The closure of Chase Bank earlier this year is expected to have caused a similar distress in the system with small and medium sized lenders being the most affected.
Raising cash under distress pushes up interest expense for banks, slashing their trading margins.
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