As more banks raise funds offshore, the Central Bank of Nigeria (CBN) has put up measures to ensure that the exposure to risk posed by the increased foreign exchange borrowing to the industry is well managed, limiting the aggregate foreign currency borrowing of banks to 75 per cent of their shareholders fund.
Nigerian banks have been exposed to the Eurobond market to the tune of $3.9 billion as Tier II since 2011, with $1.9 billion of it contracted this year spurred by wider dollar lending opportunities in the power and oil and gas sectors.
The CBN, in a circular issued to all the banks and made available to journalists yesterday, raised concerns on the foreign exchange risks posed by the increased foreign currency debt, saying the move was to ensure “that these risks are well managed and to avoid losses that could pose material systemic challenges.”
In the circular, the apex bank stated that “the aggregate foreign currency borrowing of a bank excluding intergroup and inter-bank (Nigerian banks) borrowing should not exceed 75 per cent of its shareholders’ funds unimpaired by losses. The 75 per cent limit supercedes the 200 per cent specified in Section 6 of our Guidelines for Foreign Borrowing for on-lending by Nigerian Banks issued on November 26, 2001.”
Also the CBN directed that “Net Open Position (long or short) of the overall foreign currency assets and liabilities taking into cognizance both those on and off balance sheet should not exceed 20 per cent of shareholders’ funds unimpaired by losses using the Gross Aggregate Method.
“Banks whose current NOP exceed 20 per cent of their shareholders’ funds are required to bring them to prudential limit within six months. Banks are required to compute their monthly NOP using the attached template.”
Also the CBN directed that banks borrow and lend in the same currency to avoid currency mismatch associated with foreign currency risk, adding that “the basis of the interest rate for borrowing should be the same as that of lending i.e. there should be no mismatch in floating and fixed interest rates, to mitigate basis risk associated with foreign borrowing interest rate risk.
“With respect to Eurobonds, any clause of early redemption should be at the instance of the issuer and approval obtained from the CBN in this regard, even if the bond does not qualify as tier 2 capital.
A report by the CBN had revealed that a stress test that was conducted on banks last December, showed that the industry, large, medium and small banks’ capital adequacy ratio (CAR) deteriorated to 12.23 per cent, 11.07 per cent, 13.54 per cent and 14.12 per cent, respectively when 30 per cent of the total foreign exchange loan exposure was assumed lost.