The Central Bank of Nigeria (CBN) has been warned by the World Bank to seize supporting undercapitalised banks in the country. The support, according to a new report by the international financial institution, could deteriorate the assets of Nigerian commercial banks.
According to the report, the CBN had supported four banks that were severely undercapitalised with liquidity without requiring recapitalisation plan. The World Bank warned that if CBN continues to operate with leniency in matters relating to undercapitalised banks, assets of the financial market will worsen.
The World Bank warning was contained in its Nigeria Economic Update. “The CBN gave liquidity support to four medium-sized banks that were severely undercapitalised, without requiring hard time-bound recapitalisation plans.
“Going forward, asset quality needs to be closely monitored because it may deteriorate if the CBN continues to exercise regulatory forbearance for undercapitalised banks. Banks are performing better, but asset quality needs to be monitored closely,” the World Bank said.
CBN’s lending policy: The measures by the CBN to improve bank lending to private sector worries the World Bank. The CBN had directed banks in July, to ensure a minimum loan-to-deposit ratio of 60 per cent by September 30, 2019. Any bank that fails to meet the directive – which is reviewed quarterly – additional cash reserve requirements on the shortfall will be imposed on it.
According to the World Bank, the economy could be impacted negatively by the measures because banks might begin to approve loans regardless of the level of risk exposure.
“It is possible that policy and regulatory efforts to stimulate commercial bank lending to selected private credit segments, while well-intentioned, could entail unintended negative consequences.
“For example, the minimum LDR requirement could lead banks to approve loans that expose them to more risky credits, undermining the quality of their loan portfolios.”
The World Bank said measures previously taken on bank lending had limited success, adding that the development could lead banks to shift funding modalities away from mobilising deposits, which would undermine financial inclusion initiatives.
“Dropping the level of deposits for which the CBN would remunerate banks when using the Standing Deposit Facility could undermine its ability to control liquidity conditions in the banking system, and additional, potentially costlier open market operations would be required to drain liquidity,” the World Bank added.
Criticism trails loan for MSMES: The credit facility provided by the CBN to micro, small, and medium-scale enterprises in agriculture and manufacturing could backfire according to the global bank. It also warns that it could affects CBN’s oversight role in the banking sector, its objectives as an operator of development financing schemes and its interests as a shareholder in development finance institutions.
“The CBN interventions could undermine the effectiveness of the credit transmission channel of monetary policy and the signalling role of changes in the Monetary Policy Rate.
“The interventions could crowd out private-sector funding by discouraging banks from venturing into under-served markets without subsidies when the schemes are not properly targeted, as well as creating expectations for borrowing at single-digit rates.”
In the Nigeria Economic Update reported, the development could also reduce the CBN’s operational surpluses, a share of which was normally transferred to the Federal Government as part of its independent revenue. It was also stated that financially supporting the MSMEs could diminish transparency and accountability in the allocation of public resources by circumventing the government’s standard budgetary process, the bank said.
CBN extends Covid-19 forbearance for intervention loans by another 12 months
CBN will continue to charge an interest rate of 5% for its intervention loans for another 1 year.
The Central Bank of Nigeria has announced an extension of its regulatory forbearance for the restructuring of its intervention facilities by another 12 months.
In a circular signed by Dr. Kevin Amugo, the Director of Financial Policy and Regulatory. the apex bank said it will continue to charge its borrowers an interest rate of 5% per annum as against the 9% originally offered. The CBN had on March 20th reduced the interest rates on its intervention loans from 9% to 5% as part of its response to the economic crunch brought on by Covid-19 induced lockdowns.
The CBN also offered to rollover moratorium granted on all principal payments on a case by case basis. All credit facilities had been granted a one-year moratorium starting from march 1, 2020 when the pandemic first gripped Nigeria.
See excerpt from Circular
“The Central Bank of Nigeria reduced the interest rates on the CBN intervention facilities from 9% to 5% per annum for one-year effective March 1, 2020, as part of measures to mitigate the negative impact of COVID-19 Pandemic on the Nigerian economy.”
Credit facilities, availed through participating banks and OFIs, were also granted a one-year moratorium on all principal payments with effect from March 1, 2020.
Following the expiration of the above timelines, the CBN hereby approves as follows:
1) The extension by another twelve (12) months to February 28, 2022 of the discounted interest rate for the CBN intervention facilities;
2) The roll-over of the moratorium on the above facilities shall be considered on a case by case basis.
What this means
Companies who secured intervention funds from the CBN or through any of its on-lending banks will continue to service the loans at an interest rate of 5% per annum instead of 9%.
- They can also get another year of not needing to pay back the principal sum collection. However, they will need to apply.
- Whilst this move helps the small businesses continue to manage their cash flow, it means the CBN will record a reduction in its income extended under such facility.
- Regulatory forbearance is a widely adopted concept during an economic crunch and it is meant to help stimulate businesses. These pronouncements if implemented will only affect those who borrow from the CBN or BOI but those who do not will miss out.
- Download the circular here.
LNG boss tasks FG to begin the monetization of Nigeria’s gas
Mr Attah has urged the FG to take the gas sector more seriously as the future of Nigeria’s energy lies with it.
The MD and CEO of Nigeria LNG Limited Mr. Tony Attah has tasked the Federal Government to begin the revamping and monetization of the Gas sector in Nigeria.
He made this statement while making his presentation at the 2nd virtual Nigerian Gas Association (NGA) Industry Multilogues, with the theme: “Powering Forward, Enabling Nigeria’s Industrialization via Gas.”
Mr. Tony Attah drew the attention of the audience to the hidden treasure in the Nigerian Gas industry which he believes is not getting enough attention from the government.
On the future of gas as an alternative energy source, Mr. Attah stated that the developed world is already keying into gas as an alternative to crude oil. Gas has proven to be a cleaner and more sustainable alternative.
He exclaimed that Nigeria is very rich in gas and yet poor in energy. Nigeria is the 9th country with the largest gas reserves in the world but makes very little use of it.
Mr. Attah went further to paint a clear picture of the promise of investing in gas using the success achieved by Qatar. Qatar is currently the largest LNG exporter in the world.
“We just touched on a quick case study of Qatar. Someone mentioned Qatar already from a poor fishing country to a gas giant and it took just 10 years, which is why we, as Nigeria LNG, firmly believe in the conversation and the narrative about the declaration of the decade of gas.
“We believe it is possible. If you look at Qatar from 1995, when they really went into gas development, we were just two years behind Qatar. So, Qatar’s first LNG was in 1997.
“Nigeria’s first LNG was in 1999, just two years behind. But then, within 10 years, because of the deliberateness of the government and focus on gas, they have gone to 77 million tonnes and we are at best, 22 million tonnes,” Attah said.
Mr. Attah stressed further the importance of the gas sector in Nigeria’s future. He recalled that the Nigerian Government declared 2021-2030 as the decade of gas. He pleaded with the government to take the sector more seriously as the future of Nigeria’s energy lies with it.
“Gas is the future. That future is now, and just as the Minister of State has made us to realize, gas is food in fertilizer. Gas is transport as you saw in the Auto gas project that was declared.
“Gas is life, as a matter of fact, for cooking, for heating, for existence. Gas is development in manufacturing, gas is power. Gas is everything. “We think it’s time for gas. It’s time for Nigeria to diversify and that is why we fully support the decade of gas,” he said.
What you should know
- Early last year, the director of the Department of Petroleum Resources (DPR) Mr Sarki Auwalu confirmed that Nigeria’s proven gas reserve stood at 203.16 trillion cubic feet.
- Nigeria has the 9th largest gas reserves in the world. It is also the 6th largest exporter of gas.
- The Federal Government declared the year 2021–2030 as the “Year of the Gas“. It pledged to finally kick start the development and commercialization of Nigeria’s huge gas reserves.
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