In a move aimed at bolstering the Nigerian banking sector amid volatile foreign exchange (FX) rates, the Central Bank of Nigeria (CBN) has issued a new circular stopping banks from recklessly spending gains made from forex revaluation.
Nigerian banks mostly reported massive profits in the half-year results mostly arising from the depreciation of the naira following the unification of exchange rate windows.
The depreciation notionally increased the balance sheet of the banks in naira based on their forex holdings. The apex bank fears, that banks could be tempted to spend the profits making them vulnerable if the exchange rate strengthens.
The apex bank distributed a letter to all banks, detailing directives that must be immediately implemented. In a proactive measure to safeguard against future adverse FX rate movements, banks are now mandated to set aside their foreign currency revaluation gains.
The CBN opines that these gains will serve as counter-cyclical buffers and cannot be utilized for dividend payouts or operating expenses.
Regulatory Forbearance on Limits
The CBN has taken into account that the recent FX policy changes could lead to regulatory breaches such as exceeding Single Obligor Limits (SOL) and Net Open Position (NOP) limits.
As a mitigating measure, the central bank will grant forbearance to banks that surpass these limits due to the policy change, provided they apply for it.
This forbearance will be restricted to existing facilities as of the effective date of the new guidelines. See excerpts of the guidelines
The Bank thus approved the following prudential guidance and directives for immediate implementation by banks:
1. Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilize such FX revaluation gains to pay dividend or meet operating expenses.
2. Single Obligor Limit (SOL): Banks that inadvertently breach the Single Obligor
– Limit (SOL) due to the FX policy will be granted forbearance upon application to the CB. The forbearance shall apply only to existing facilities as at the effective date of this policy. Such banks shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.3. Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application to the CBN.
4. Existing prudential regulations on capital adequacy, dividend payments and FCY borrowing limits shall continue to apply.
What this means in plain English
By this circular the apex bank is simply telling banks to do the following;
- Banks should not use the extra money they make from FCY revaluation to pay dividends or expenses. Instead, they should save it for future losses if the exchange rate goes down. This is called a counter-cyclical buffer.
- Banks that have lent more than the allowed limit to one borrower because of the FCY policy can ask the Bank for permission to keep the loan. This is called forbearance. The Bank will not penalize them for breaking the limit, but only for loans that existed before the policy.
- Banks that have more FCY assets or liabilities than the allowed limit because of the FCY revaluation can also ask the Bank for forbearance. The Bank will not penalize them for breaking the limit either.
- Banks should still follow the existing rules on how much capital they need, how much dividends they can pay, and how much FCY they can borrow.
See the circular below
