The Central Bank of Nigeria(CBN) raised the risk of banks’ lending to states, local governments, Ministries, Departments and Agencies (MDAs) by 100 per cent because of their failure to exercise due diligence during such transactions, it has emerged.
The CBN is also worried by corruption in the process, sources said.
The banks, it was learnt, found public sector lending quite attractive because of their ability to levy excessive fees on such transactions and also get the states to keep the Federation Account Allocation Committee (FAAC) account with them.
Some banks were said to have failed to properly document their loans to states, leading to defaults and restructuring in many cases after a regime change.
In a letter to banks and discount houses, Director, Banking Supervision, CBN, Mrs Tokunbo Martins informed banks of the hike in the risk weight assigned to direct lending to the public sector from 100 to 200 per cent.
She said investments in the Federal Government’s bonds would continue to attract zero per cent risk weight. States bonds, that meet the eligibility criteria in the Guidelines for Granting Liquidity Status for State Government Bonds would continue to be risk weighted at 20 per cent.
“Where the exposure to any industry economic sector (as defined by the International Standard Industrial Classification of Economic Sector as issued by the CBN) is in excess of 20 per cent of the total credit facilities of a bank, the risk weight of the entire portfolio shall be 150 per cent. Total exposure to a particular industry would include off-balance sheet engagements in which the bank takes the credit risk,” she said.
The review of risk weights assigned to some identified exposures is without prejudice to the risk management control functions put in place by banks and discount houses to mitigate credit concentration risks, she said.
Mrs Martins said the recent banking crisis highlighted several weaknesses in the system, key of which was the excessive concentration of credit in the asset portfolios of banks.
“Past experience revealed concentrations across products, business lines, and legal entities. The management of concentrations, or pools of exposures, whose collective performance may potentially affect a bank negatively, needs to be properly managed through the establishment of sound risk management processes,” she said.
“Without prejudice to the risk management control functions put in place by banks and discount houses to mitigate credit concentration risks, the CBN, in line with its risk-based supervisory review process has reviewed the risk weights assigned to some identified exposures. The risk weight assigned to direct lending to local governments, states, ministries, Departments and Agencies of Governments (MDAs) is increased from 100 per cent to 200 per cent,” she said.
A senior banker with a first generation bank who craved anonymity, defended banks on the matter, saying there is nothing wrong in lending to the public sector. But, he said, when a bank fails to recover the loans before the tenure of the current regime expires, the priority of a new government will not be loans repayment. This, he said, is why a lot of public sector loans are not performing.
“Banks are always reminded of the history of non-performing public sector credits, and are therefore strongly advised to exercise caution and set a more conservative threshold to avoid the mistakes of the past. This follows the CBN’s earlier directive to banks to limit loans to the public sector to 10 per cent of their overall credit portfolios, an apparent effort to divert more funds to the private sector,” he said.
Already, banks are said to be lobbying CBN to relax the policy limiting their credit exposure to public sector.
