Banks Lose Appetite For State, LG Funds As 75% CRR Limits Lending

Banks are holding less money for state and local governments, months after the Central Bank of Nigeria (CBN) made it costlier to keep such funds.

Following the CBN’s implementation of the 75 per cent cash reserve requirement on non-TSA accounts last year as a measure to curb the liquidity surge in the country, deposits by state and local governments in commercial and merchant banks have begun to dwindle.

Data from the CBN show that deposits of state and local governments in commercial and merchant banks fell to N2.668 trillion at the end of the first quarter of 2026. That is 13.4 per cent lower than the N3.082 trillion recorded in the same period of 2025.

The drop follows the CBN’s decision in September 2025 to impose a 75 per cent Cash Reserve Requirement (CRR) on non-Treasury Single Account (TSA) deposits. The Monetary Policy Committee (MPC) introduced the rule to curb excess liquidity in the system.

Non-TSA deposits are the funds that state and local governments keep with banks. TSA balances, by contrast, cover the revenues, receipts and payments of federal ministries, departments, agencies and other institutions, and are held directly at the CBN.

The fall is happening even as states receive more money. Allocations from the Federal Accounts Allocation Committee (FAAC) rose from N1.578 trillion in March 2025 to N2.038 trillion in March 2026.

The monthly figures show the slide. Deposits stood at N3.82 trillion in September 2025, fell to N3.067 trillion in October and rose slightly to N3.11 trillion in November. They dropped to N2.756 trillion in December and N2.635 trillion in January, then edged up to N2.744 trillion in February before ending March at N2.668 trillion.

This figure represents a 13.4 per cent decline from the N3.082 trillion in deposits held by states and local governments in commercial and merchant banks as of the end of the first quarter of last year.

The Monetary Policy Committee (MPC) of the CBN had, at the end of its meeting in September last year, introduced a new 75 per cent CRR on non-TSA accounts.

While TSA balances include revenues, receipts, and payments of ministries, departments, agencies, parastatals, and other institutions of the Federal Government and are warehoused directly with the CBN, non-TSA deposits represent state and local government funds typically maintained with banks.

According to the Head of Financial Institutions Ratings at Agusto & Co, Ayokunle Olubunmi, the 75 per cent CRR, along with the volatility of funds, which primarily come from the Federal Accounts Allocation Committee (FAAC), has become undesirable for banks.

Chief Executive of the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, had noted that the 75 per cent CRR on non-TSA accounts had served as a safeguard against volatility, saying “the 75 per cent CRR on non-TSA deposits is a prudent step to contain liquidity risks that arise from fiscal operations. Without such control, excess public sector liquidity in the banking system could undermine recent progress in price stability.”

Analysts noted that volatility in FAAC allocation inflows into the financial system also affects the foreign exchange market, as excess liquidity drives demand for forex.

According to analysts at Cardinal Stone, the CRR on non-TSA accounts had subtly reduced the risk of large FAAC-related inflows driving forex demand pressures at the parallel market.

Data released by the CBN showed that despite a rise in FAAC allocation, the deposit of state and local governments in commercial and merchant banks have been on the decline.

FAAC allocation had risen from N1.578 trillion in March last year to N2.038 trillion in March this year.

Meanwhile, state and local government deposits at banks, which were N3.082 trillion in March last year, began a staggered decline after the September 2025 MPC meeting, which introduced the 75 per cent CRR on non-TSA accounts.

As of September last year, deposits stood at N3.82 trillion, declining to N3.067 trillion in October, then rising to N3.11 trillion in November. By the end of December, the deposit had dropped to N2.756 trillion, then declined further to N2.635 trillion in January before rising to N2.744 trillion in February. By the end of March, it stood lower at N3.668 trillion.

Ayokunle, speaking on the downward trend of public sector funds in the coffers of banks, said “the appetite for public sector deposits has actually dropped. But apart from the TSA, what the local banks also realise is that that fund is actually very volatile.”

This is true, as states that have collected FAAC will have to pay contractors and salaries within a matter of weeks, making the funds quite volatile for banks.