Monday , January 17 2022

World Banks warns CBN on leniency towards undercapitalized banks, lending policies

The Central Bank of Nigeria (CBN) has been warned by the World Bank to seize supporting undercapitalized banks in the country. The support, according to a new report by the international financial institution, could deteriorate the assets of Nigerian commercial banks.

According to the report, the CBN had supported four banks that were severely undercapitalized with liquidity without requiring recapitalisation plan. The World Bank warned that if CBN continues to operate with leniency in matters relating to undercapitalized banks, assets of the financial market will worsen.

The World Bank warning was contained in its Nigeria Economic Update. “The CBN gave liquidity support to four medium-sized banks that were severely undercapitalised, without requiring hard time-bound recapitalisation plans.

“Going forward, asset quality needs to be closely monitored because it may deteriorate if the CBN continues to exercise regulatory forbearance for undercapitalised banks. Banks are performing better, but asset quality needs to be monitored closely,” the World Bank said.

The measures by the CBN to improve bank lending to private sector worries the World Bank. Recall that, CBN had directed banks in July, to ensure a minimum loan-to-deposit ratio of 60 per cent by September 30, 2019. Any bank that fails to meet the directive – which is reviewed quarterly – additional cash reserve requirements on the shortfall will be imposed on it.

According to the World Bank, the economy could be impacted negatively by the measures because banks might begin to approve loans regardless of the level of risk exposure.

“It is possible that policy and regulatory efforts to stimulate commercial bank lending to selected private credit segments, while well-intentioned, could entail unintended negative consequences.

“For example, the minimum LDR requirement could lead banks to approve loans that expose them to more risky credits, undermining the quality of their loan portfolios.”

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The World Bank said measures previously taken on bank lending had limited success, adding that the development could lead banks to shift funding modalities away from mobilising deposits, which would undermine financial inclusion initiatives.

“Dropping the level of deposits for which the CBN would remunerate banks when using the Standing Deposit Facility could undermine its ability to control liquidity conditions in the banking system, and additional, potentially costlier open market operations would be required to drain liquidity,” the World Bank added.

The credit facility provided by the CBN to micro, small, and medium-scale enterprises in agriculture and manufacturing could backfire according to the global bank. It also warns that it could affects CBN’s oversight role in the banking sector, its objectives as an operator of development financing schemes and its interests as a shareholder in development finance institutions.

“The CBN interventions could undermine the effectiveness of the credit transmission channel of monetary policy and the signalling role of changes in the Monetary Policy Rate.

“The interventions could crowd out private-sector funding by discouraging banks from venturing into under-served markets without subsidies when the schemes are not properly targeted, as well as creating expectations for borrowing at single-digit rates.”

In the Nigeria Economic Update reported, the development could also reduce the CBN’s operational surpluses, a share of which was normally transferred to the Federal Government as part of its independent revenue. It was also stated that financially supporting the MSMEs could diminish transparency and accountability in the allocation of public resources by circumventing the government’s standard budgetary process, the bank said.

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