CBN Increases Borrowing Cap To 125% of Shareholders’ Funds
Nairametrics| The Central Bank of Nigeria, on Thursday, increased the cap on foreign borrowings available to commercial banks from 75% to 125%, according to reports from Reuters. According to the CBN, this decision became necessary due to the recent fall in the naira. As a result, some commercial banks had inadvertently surpassed the earlier prevailing 75% cap.
The CBN also noted that the sharp falls in the currency has caused lenders to see their dollar loan books swell in naira terms. This, in turn, means that they have to hold more capital in order to keep within a regulatory threshold of loan to capital ratio.
“To address this development … the aggregate foreign currency borrowing of a bank borrowing should not exceed 125 percent of shareholders’ funds.” Reuters quotes the CBN circular as saying. Aside from the cap, however, the CBN released other guidelines on foreign borrowing.
For instance, it now prescribes that all foreign borrowing should be hedged through the financial markets and debt should have a minimum of five year maturity except for trade lines, while lenders are required to report their utilization of foreign currency borrowings on a monthly basis.
The CBN has been trying to curb pressures on the naira from excess demand for dollars. It also wants to help avoid widespread capital raises for the banking industry given the weak equity markets and expensive debt market yields.