Bad Debts: CBN Plans Tougher Bank Capital Rules

• Bad Debts: CBN Plans Tougher Bank Capital Rules

The Central Bank of Nigeria plans to introduce fresh capital rules in the second quarter of this year, threatening to heap pressure on banks already weighed down by bad loans.

Non-performing loans in the banking sector rose to N2.245tn in the third quarter of last year from N1.939tn in the second quarter, according to data from the National Bureau of Statistics.

The NBS data showed that the NPL ratio – a key metric for banks’ health – rose to 14.16 per cent in the third quarter from 12.45 per cent in the previous quarter, compared to a regulatory limit of five per cent.

Bloomberg quoted the CBN as saying in an emailed response to questions that the new requirements would be stricter in terms of what funding qualified as capital and would also require lenders to create “capital conservation” and “counter-cyclical” buffers.

According to the apex bank, the rule seeks to protect the nation’s banks “against shocks emanating locally and from abroad” by increasing the level of regulatory capital and the quality of the assets.

The central bank said it would “apply a leverage ratio to supplement existing capital ratios” for lenders as well as “additional loss-absorbency requirements for domestic-systemically important banks.”

“Country and cross-border risk guidelines are being developed for the assessment of risks arising from across border operations of Nigerian banks,” it added.

The regulator is aligning itself with a global accord known as Basel III three years after a contraction in Nigeria’s economy spurred authorities to delay the implementation of tougher capital rules. It also comes after policymakers in 2013 spurned some requirements drawn up by the Basel Committee on Banking Supervision.

Nigerian authorities migrated banks to a new accounting standard known as IFRS 9 last year to improve disclosure by forcing lenders to provide for existing losses as well as those that might occur in the future.

While the average capital-adequacy ratio for the industry rose to 12.1 per cent in June from 10.2 per cent at the end of 2017, some banks said the transition shaved as much as 200 basis points off their capital bases.

Lenders are struggling to contend with non-performing loans equal to 12.5 per cent of total credit. While these have improved from almost 15 per cent in 2017, many small- to medium-sized banks are battling to raise capital.

Worried about the declining health of Skye Bank, the Central Bank of Nigeria sacked its board of directors in 2016 and constituted a new board, saying the moves had become unavoidable in view of the persistent failure of the bank to meet minimum thresholds in critical prudential and adequacy ratios.

In September this year, the apex bank revoked the operating licence of Skye Bank and created a bridge bank, Polaris, to take over its assets and liabilities.

Access Bank Plc is in the process of taking over Diamond Bank Plc.

The Monetary Policy Committee of the CBN said at its meeting in September 2018 that it was concerned with “the rising level of non-performing loans in the banking system, traced mainly to the oil sector” and urged the CBN to closely monitor and address the situation.

In November, several members of the MPC again voiced concerns over the share of the nation’s oil and gas industry in the large volume of NPLs in banks.