CBN Goes Tough On Bank Lending To MDAs, States, LGAs

Local governments, state governments and ministries, departments and agencies (MDAs) seeking bank loans would henceforth find it difficult or pay very high interest rates when they borrow, as the Central Bank of Nigeria (CBN) has doubled the risk weight attached to banks’ loan exposure to them.
The apex bank, which yesterday announced the review of weights associated with banks and discount houses’ exposure to different classes of borrowers, increased the risk weight of LGs, states and MDAs from 100 per cent to 200 per cent, thus making it difficult for them to borrow from banks.
With this review, banks would now be required to make 200 per cent provisioning for loans to these borrowers since it has classified them as having 200 per cent risk of defaulting.
In a circular issued to all banks and discount houses in the country by the CBN director of banking supervision, Mrs Tokunbo Martins, the CBN stated that it had identified that recent crises in the banking industry had highlighted several weaknesses in the banking system.
According to the apex bank, a major contributor to these weaknesses was the excessive concentration of credit in the asset portfolios of banks, which cut across products, business lines and legal entities, among others.
It, therefore, urged banks to properly manage the concentration through the establishment of sound risk management processes.
However, the CBN said that investments in federal government bonds should continue to attract zero per cent risk weight, while state government bonds would remain at 20 per cent.
It said that where the exposure to any industry was 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.
The apex bank said that total exposure to a particular industry would include off-balance sheet engagements in which the bank takes the credit risk.
The apex bank also emphasised that all the breaches of single obligor limits without the prior approval of the CBN would be regarded as impairment to capital.
The CBN also reviews how banks should henceforth treat credit transactions with related parties within a holding company structure, which should include the financial holding company (FHC) and other subsidiaries within the group.
To this end, in dealing with credit transactions by the bank within the group, FHC lending to a bank within its group should be treated as a liability, credit by a bank to its FHC should be regarded as a return of capital and deducted from the capital of the bank in computing its capital adequacy, while bank lending to subsidiaries within the group would be assigned a risk weight of 100 per cent where the credit is fully secured; otherwise it would be deducted from the capital when computing capital adequacy.