The Central Bank of Nigeria (CBN) has issued guidelines aimed at reducing non-performing loans in the banking sector and to monitor chronic loan defaulters. This was disclosed in a circular the apex bank issued to all banks and other financial institutions tagged ‘Operational Guidelines on global standing instruction – Individuals.’
The Guidelines are expected to take off from August 1, 2020. The GSI guidelines give banks the power to debit loan and accrued interest due from bank accounts of loan defaulters across the Nigerian banking system. The NIBSS will manage the entire operations of the GSI on behalf of banks using customers Bank Verification Numbers (BVN).
Guidelines on global standing instruction
The circular, which was signed by the Director, Financial Policy and Regulation Department, CBN, stated,
“The Bankers’ Committee, at its meeting on February 18, 2020, approved the go-live on the Global Standing Instruction, which aimed at facilitating an improved credit repayment culture; reducing non-performing loans in the Nigerian banking system; and watch-listing consistent loan defaulters.”
“The banks would review and validate the GSI mandate instrument prior to loan disbursement. They would indemnify the Nigeria Inter-Bank Settlement System and other participating financial institutions from all liabilities that may arise from inappropriate use of the GSI infrastructure,” it added.
The CBN added that the banks would retain copies of physical or digital version of the executed GSI mandate and provide same when required. According to CBN, the participating financial institutions must execute the GSI mandate agreement with NIBSS.
It stated, “They must also ensure all qualifying accounts were properly maintained and visible to NIBSS on the industry customer accounts database or by any other service created or provisioned for this purpose.”
The guidelines stated that they must “ensure that accounts in NIBSS’ ICAD are correctly tagged with correct Bank Verification Number, and ensure and maintain connectivity to the Nigeria Central Switch.
How GSI will work
Bank borrowers are expected to sign a GSI mandate in hard copy or digital form. Once this is done all qualifying accounts are linked to his/her BVN.
- Qualifying accounts include savings accounts, current accounts, domiciliary accounts, domiciliary accounts, investment accounts and joint accounts.
- These accounts are all expected to be linked to a BVN. If for any reason the borrower has an account that is not linked to their BVN, the account will be watch listed.
- Once a borrower defaults on an outstanding principal and interest, the bank instructs NIBSS to debit the bank account of the defaulter.
Last year the central bank revealed plans that it was in conjunction with the NIBSS and the Bankers’ Committee agreeing to launch an initiative that will allow lenders to recover loans from deposit accounts of loan defaulters from any bank or financial institution in the country. This was a process that started in May 2019 by the bankers committee “declaring war” on non-performing loans.
In August, CBN Deputy Governor Aishah Ahmad, the Deputy Governor of the CBN at the end of the meeting of the Bankers’ Committee held in Abuja revealed that they have now allowed banks to come up with a credit risk protection clause that allows banks to recover their loans.
“This is going to be a credit risk protection clause. Basically, it will contain the BVN details and TIN of the customers and more or less it will be a commitment on the part of the customers that you agree that should you default on the loan, the total amount of deposits you have across the banking industry would be applied towards repaying the loan.”
What this means
With the latest approval granted by the CBN to banks, loan defaulters who have funds in accounts across any bank in the country should expect debit alert from their respective banks any moment from now.
- The new approval also means that for interested loan applicants, a new clause has been introduced, which mandates you to give consent to your bank to debit your accounts in any Nigerian bank where you have funds in the event of you defaulting.
- Although, the right to setoff account balances has existed among banks in the past but hasn’t been operational across all banks.
- It was learned that once a customer defaults on their loans, relying on BVN, NIBSS will first recover the loans from the defaulter’s balance in any account within the bank. If that is not enough, it will proceed to other accounts deposited in other banks.
- The guidelines apply to savings accounts, current accounts, domiciliary accounts, domiciliary accounts, investment accounts and joint accounts.
- Download GSI guidelines.
3 major ways COVID-19 will affect Banks’ 2020 profits
The oil price crash coupled with border closures have worsened Nigeria’s FX deficit.
The last has definitely not been heard of the economic impact of COVID-19, despite the seeming normalcy that is beginning to return to the economy post lockdown. The Nigerian banking industry, which has consistently been the most profitable single sector traded on the NSE and accounts for over 50% of investors’ stock traded daily, may be set for hard times ahead notwithstanding their 2020 Q1 profits and their best efforts to adapt to the new normal.
From the shutting down of the economy for months to the closing of borders and business offices of banks, here are the 3 major ways in which COVID-19 will affect the 2020 profits of Nigeria’s Lenders:
Increase in impairment and bad loans
Impairments are an additional financial cost to the lender resulting from the reduction in the creditworthiness of the borrower while bad loans are literally loans that have gone… Bad (you guessed that). Whereas bad loans are to be written off completely by the lender, impairments are deductions that should reflect in financials of the lender pending when the loans become active.
In the wake of the pandemic, the CBN took proactive measures to ensure that Banks are protected from ruinous impairments by approving the request of the Lenders to restructure loans in their books allowing more time for debtors to pay.
Notwithstanding this initiative, loans (especially in the retail space) would most likely end up being written off as unemployment rates soar and the economy slowly recovers from the effects of the pandemic. Education, aviation, and the oil and gas sector do not seem on the path of recovery yet, and their delay would most likely cost lenders with sizable exposures in their respective industries.
FX scarcity and Liquidity squeeze
These two sides of the same coin are causing painful gut-wrenching groans to be heard in the Banking sector, especially amongst lower-tiered Banks.
The oil price crash coupled with border closures have worsened Nigeria’s FX deficit and caused the CBN to employ unconventional means and policies to stabilize the Naira, even after a long-awaited devaluation.
Banks who are unable to meet the FX needs of their customers rush “cap in hand” to the CBN to get FX intervention for their corporate customers for whom the exorbitant parallel market rate is not an option. Instead of getting their requests met, their positions are debited and added to their CRR forcing them to reduce their FX demands and leave their customers dissatisfied. While this may lead to loss of deposit from these customers taking their businesses elsewhere, the major issue the Banks have with this discretionary CRR, is the foregone earnings that their extra CRR would have earned in the money market or through commercial loans.
Over N2trillion has been arbitrarily debited from Nigerian lenders since April in tranches of N1.4trillion, N300billion and N459.7billion causing some banks to have CRR in excess of the 27.5% agreed upon by the CBN Monetary Policy Committee in January 0f 2020.
The depreciating Naira is also inimical to Banks with FX denominated bonds, and is expected to impact their bottom line.
The macro economy and unfair competition
The relationship between Banks and the economy is complex. They are the gauge through which the pulse of the economy is felt, and the channel through which its life force can be restored. At no time is this complex relationship more evident than during severe economic strain, such as this pandemic. It is at this time that the Banks experience unfair competition from their regulators who are forced to provide direct, and cheaper funding to the economy sacrificing short term profitability of the Banks for long term sustainability of the economy.
In the wake of the pandemic, the CBN has provided series of intervention funds, ranging from the N50b household support, to the Agric fund, CIFI and MSME support funds at single interest rates, lower than the commercial Banks can afford.
Although the commercial Banks are listed as PFI (Performing Financial Institutions) for most of these funds, the commissions they stand to earn are in no way comparable to what it would have been had they been the direct lenders at commercial rates. This arrangement would definitely impact their creation of new risk assets and the accompanying income that would have found its way to their annual profit.
It’s not all gloom though, Bankers who chose to speak off-record claimed that the lockdown played a key role in increasing enrolments on their online platforms and the timing of the nationwide cashless policy was a “masterstroke” in ensuring that customers bought into e-channel transactions on which the Banks would earn fees and commissions. They claim that the pandemic also offered some Banks a rare opportunity to prune their operations cost without alarming their customers, as they were able to shut down not too profitable branches in some locations and redeploy their staff accordingly.
A top Treasury official in one of the new generations Banks who sought anonymity said that Banks who have earned income in FX prior to the pandemic would enjoy revaluation profit, but was quick to add that this little margin would not offset their loss of income from Letters of credit not done due to border closures, nor will it write off the rate decline in risk-free investments of Banks buying Government Bonds.
With increased cost for operational branches due to adaptability to COVID-19 protocols amongst other things, it remains to be seen how Nigerian Banks would fare in this remarkable year. Their H1 results should give more insight.
FBN Holdings announces N25 billion capital injection into FirstBank
The fresh equity capital injection is coming on the heels of FBN Holdings’ recent divestment from FBN Insurance.
N25 billion worth of equity capital has been injected into First Bank of Nigeria Limited by its parent company, FBN Holdings Plc. The move is coming on the heels of FBN Holdings’ recent divestment from FBN Insurance Ltd.
A statement signed by FBN Holdings’ Company Secretary, Seye Kosoko, as seen on the Nigerian Stock Exchange’s website, noted that the N25 billion is part of the net proceeds from the recent divestment from FBN Insurance Limited.
Following this N25 billion capital injection, First Bank of Nigeria Limited’s Capital Adequacy Ratio (CAR) has increased to 16.53%. This is before capitalising year to date profit for half-year 2020.
More details: While commenting on this development, FBN Holdings’ Chief Financial Officer, Oyewale Ariyibi, said that the “divestment has unlocked significant value embedded in the former subsidiary which is being leveraged to strengthen the core baning business for which the Group is renowned.”
The company also explained that the overriding objective of these recent moves is to “optimise capital across the Group to drive business growth, enhance efficiency, and improve overall shareholders’ value.”
The backstory: Back in April this year, FBN Holdings Plc first disclosed ongoing talks with Sanlam Emerging Markets (Proprietary) Ltd over a possible sell-off of its 65% stake in FBN Insurance to the South African firm. Fast-forward to early June, FBN Holdings again informed stakeholders that it had completed the divestment process. All the while, no mention was made about the value of the transaction until now.
Note that FBN Holdings Plc reported a profit after tax of N49.5 billion for the half-year period ended June 30th, 2020. This represents a 56.3% increase when compared with N31.6 billion reported in H1 2019. The company’s Chief Executive Officer, UK Eke, recently commented on performance, noting that “the H1 2020 financial results are impressive and reconfirm our consistent focus on enhanced shareholder value.”
FBN Holdings’ share price on the Nigerian Stock Exchange is currently trading at N5.05. The company has a market capitalisation of about N181.3 billion, according to information gleaned from Bloomberg.
Access Bank acquires Zambian Cavmont Bank Ltd
The statement from Access Bank says that the deal is a highly complementary transaction.
Access Bank Zambia, a subsidiary of Nigeria’s Access Bank Plc, has reached a ‘definitive agreement’ with Cavmont Capital Holdings Zambia Plc (CCHZ) to acquire Cavmont Bank Ltd.
The tier-1 bank announced this latest development regarding the merger talk which has been ongoing for a while, in a statement that was signed by its Company Secretary (Sunday Ekwochi) and issued to the Nigerian Stock Exchange earlier today.
According to the statement by Access Bank, the deal is a highly complementary transaction that is expected to combine Access Bank Zambia’s wholesale and trade finance capabilities with Cavmont Bank’s retail and commercial banking operations.
The proposed transaction which, in the meantime is still subject to relevant shareholder and regulatory approvals, is also expected to better position Access Bank Zambia as one of the top 10 banks in the Southern African country.
Customers from the enlarged bank will benefit from greater security offered by what will be one of the most capitalized banks in Zambia with a more diversified product and service offering and a broader geographical footprint and infrastructure.
Access Bank on its notification stated, ‘’Subsequent to our announcement on July 8, 2020, the Board of Access Bank Plc announces today that its subsidiary, Access Bank (Zambia) Limited, has entered into a definitive agreement with Cavmont Capital Holdings Zambia Plc (CCHZ) regarding proposed acquisition of Cavmont Bank Limited, a subsidiary of CCHZ and subsequent merger of Cavmont Bank’s operations into Access Bank Zambia. The proposed transaction, which remains subject to relevant shareholder and regulatory approvals, will position the enlarged Access Bank Zambia as one of the top 10 banks in Zambia and create the momentum to advance its strategic objectives.’’
‘’Under the terms of the agreement, Access Bank Zambia will acquire the entire issued ordinary share capital, assets and liabilities of Cavmont Bank while Capricom Group Limited, the ultimate majority shareholder of CCHZ will invest at least ZMW300 million ($16.5 million) of preference shares into Access Bank Zambia. Capricorn will hold preference shares in the enlarged Access Bank Zambia for a period of five years, after which the preference shares will be acquired by Access Bank Plc.’’
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The statement also notes that the enlarged bank will be well placed to participate in the long-term economic growth of Zambia and will be predicated on the country’s vast reserves of natural resources and fast growing young population.
The transaction is expected to be completed during the fourth quarter of 2020.