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Experts hail suspension of CBN’s directive on credit risk mitigation in banks

By on January 19, 2015

The decision of the Central Bank of Nigeria (CBN) to suspend the take-off of its directive on oil and gas industry credit risk mitigation in banks has been described as a well-thought-out action which promises to save money deposit banks from avoidable pressure. The policy, which was introduced late last year, was meant to assist banks to minimise and manage their loan exposures to the oil and gas sector following the falling crude oil prices.
The apex bank, had in a circular dated January 7, announced the suspension, which it attributed to the on-going implementation of the Basel I/III capital adequacy framework which the regulator said might increase pressure on banks.

Reacting to the CBN’s action, Head, Research & Investment Advisory at Sterling Capital, Mr Sewa Wusu, said the introduction of the policy in the first instance was informed by the lending exposure of banks on their balance sheets that could be impacted which means that should these obligations go bad, the banks would have to incur some heavy losses.

He is however of the opinion that the CBN relaxed the policy in order not to clog the financial system with a whole lot of policies and counter polices given the challenges the banks are facing in terms of contractionary and restrictive monetary measures on one hand and the need to shore up their capital to the required status on the other hand.

He said: “From a policy perspective, I think some of the recent policies adopted by the CBN are meant to keep the financial system in a sound position to handle anticipated shock. Most of the policies were to prevent the build-up of systemic risks which may impair the smooth functioning of the financial system and by extension the economy.

“The exposure of banks to oil and gas remains a major concern because of the declining oil prices at the international markets which have changed the dynamics of financial modelling or structure with which the loans were booked. The CBN is concerned majorly about the lending exposure of banks on their balance sheets that could be impacted which means that should these obligations go bad; the banks would record some heavy losses. There were reports that the oil and gas sectors owed the banks over N2.6 trillion.”

According to him, the decision to relax the policy for now could be seen as a clear reading of the banking industry because banks have been facing a cocktail of restrictive monetary measures in recent times.

“In his own contribution, Head of Strategy, BGL Plc, Mr. Femi Ademola said “going through the circular, I think the effect will be that the banks’ capital adequacy ratio (CAR) would be affected by the policy. This means that they may need to raise additional capital to meet up should they fall short. However, since they are already trying to comply with Basel II/III CAR which necessitates increase in capital by some of the banks, it appears reasonable to wait until the conclusion of that exercise before determining the effect of this one. It is probable that the on-going adjustment might just be adequate for this new requirement.

“I am not sure that the dynamics of foreign exchange has anything to do with the policy or its reversal. In my understanding because it is expected that the decline in oil price can affect the capacity of oil companies (to which the banks are exposed in terms of loans) to repay, these assets have become more risky to banks and should therefore be considered as such. Hence the policy seeks to increase the banks’ capital at risk due to the potential losses that may come from the revenue decline to the obligors (oil companies),” he said.

Speaking in the same vein, Managing Director, Financial Derivatives Company, Mr. Bismarck Rewene, said the CBN’s decision to suspend the take-off of the policy on credit risk mitigation in banks was to reduce the pressure on banks.

He explained that “The capital adequacy ratios introduced by Basel 11/111 are universal and global principles of banks adequacy. Nigerian banks have been well capitalised before these new procedures. But based on these new procedures of adjusted capital measures, it is very forward looking. And if it applies, it means many of the banks will have to raise additional capital in the short run at a time when the capital market is already down. So the ability of many of them to meet the capital requirement is reduced. It is necessary to implement the policy but it may create panic in the market.”

Rewane pointed out that the current slump in oil price does not really make exposure to oil sector unprofitable because the price of oil is still far above the cost of oil which is currently at $25 dollar per barrel. The point is most of these people bought assets  based on a price assumption of $90 per barrel  and took it and agree for example to pay back in five years’ time but with the current development, it has to be staggered and be repaid back in 10 or 15 years’ time. So, it doesn’t question the validity of the transactions. It only makes it longer, they will have to hold on for a long time before they can recover their money,” he said.

According to reports, banks with the highest exposure to oil and gas sector include Stanbic IBTC Bank Plc, Sterling Bank Plc, Guaranty Trust Bank, Access Bank Plc and First Bank Nigeria Holdings. Others are Union Bank Nigeria, Diamond Bank Plc, First City Monument Bank Plc, Zenith Bank Plc and Fidelity Bank Plc.

 

[ThisDay]