CBN: banks breach loan limit regulation

Commercial banks have not been complying with Central Bank of Nigeria (CBN) loan limit rule for single borrowers, the apex bank Governor, Olayemi Cardoso, said yesterday.
Cardoso spoke at the Nigeria Sustainability Summit 2023, with the theme: “Crisis-resilient and new Nigerian economy”.

The CBN boss, who was represented by the bank’s Director on Financial Policy and Regulation, Haruna Bala Mustafa, said banks breach the single obligor limit policy.

The policy stipulates a maximum amount that each lender can give to a single borrower based on its shareholders funds.

By the regulations governing the single obligor limit, a bank is not allowed to grant more than 20 per cent of its shareholders funds to any one person (natural person or corporate body) including the subsidiaries, associates and the related parties of such a person. The policy was created by the apex bank to prevent lenders from giving excessive credit to a single borrower.

Cardoso said the apex bank took the decision for a fresh recapitalisation of banks because the country needed a banking sector that would be able to handle global transactions.

He said: “There is the need to take a second look at the existing capital regime. Recently, a number of policies were rolled out that had an impact on the banking system. One was the removal of subsidy on petrol and the second was the recent forex unification.

“Currently, because of the impact of some of these policies, we have seen banks breaching some of the key metrics, such as single obligor limits for instance, because this is a function of capital.

“You couldn’t fund a transaction without us looking at your exposure to a single borrower. These are some of the protective rules that we put in place to check banks.

“Let us go back to 2005 when Prof. Chukwuma Soludo increased banking capitalisation from N2 billion to N25 billion to strengthen Nigerian banks to play on the global stage. If you recall, we had a motley crowd of 89 mostly weak banks that could not fund a big ticket transaction.

“Back to the traditional function of capital which is to cushion and absorb unexpected losses, it was as if the governor then saw tomorrow, just two years down the line, global financial crisis hit erupted.

“And but for that proactive move, the second round effect of that crisis would have wiped off a number of banks and that would have had disastrous consequences for the stability of the Nigerian banking system.”

He said the planned bank recapitalization will enable the country achieve the $1 trillion economy target set by the Federal Government.

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Cardoso said the CBN’s commitment to sustainability is total.

“It has been 10 years since we started sustainability banking principles, which is a voluntary initiative and it has been advisory. There is an ongoing effort to come up with regulations around climate related risks. It is not yet official but I think it mirrors the trend globally.”

Also speaking, Head, Group Sustainability, Access Holdings Plc, Mrs. Omobolanle Victor-Laniyan, said there was urgent need for a sustainable approach to development.According to her, the private sector has a pivotal role to play, leveraging its resources, innovation, and influence to drive positive change.

She said: “It is in this spirit that we convene the Nigerian Sustainability Summit, to harness the expertise, resources, and innovation within our reach.

“Today, we come together under the theme: ‘Crisis resilience and the new Nigerian economy.’ This, for us, serves as a call to action, urging us to collaborate, and devise strategies that will position Nigeria at the forefront of the charge towards achieving Africa’s sustainability objectives.

“We acknowledge the challenges that have hindered sustainable development in Nigeria, but we stand united in our determination to overcome them. Within these challenges lie opportunities for progress and transformation.

“The private sector, with its dynamism, influence, and commitment, holds the key to driving meaningful change that will positively impact the environment, society, and our economy.”

According to Victor-Laniyan, meaningful partnerships, like the one we foster today, create an ecosystem conducive to sustainability.

“Together, we can promote environmentally friendly practices, drive economic growth, and enhance the quality of life for every Nigerian.

“By leveraging our collective strengths, advocating sustainable policies, and implementing innovative solutions, we can pave the way for a brighter, more sustainable future.”

Defaulting banks to face additional loan loss provisions

According to CBN’s Prudential Guidelines for Commercial Banks, non-compliance with a bank’s established policy on credit concentration and monitoring shall form a basis for supervisory action which may include additional loan loss provisions.

The guidelines said limits shall be defined in relation to a bank’s capital, total assets or, where adequate measures exist, its overall risk level.

According to the CBN guidelines, 50 per cent of a bank’s off-balance sheet engagements shall be applied in determining the bank’s statutory limit to a single obligor while the total outstanding exposure (on and off-balance sheet) by a bank to all tiers of government and their agencies shall not at any point in time exceed 10 per cent of the total credit portfolio.

The guidelines said: “In assessing credit risk concentration of a bank, the CBN will consider the credit concentration policy, the credit portfolio plan and the extent to which the bank considers credit concentration as part of the subjective factors in making specific provisions.”