September 12, (THEWILL) – The Central Bank of Nigeria (CBN) has moved to stop the deposit money banks from spending the massive gains from the recent forex revaluation which has exceedingly bolstered the treasury and balance sheets of the banks.
Nigerian banks reported massive profits in the half-year results mostly arising from the depreciation of the naira following the unification of exchange rate windows.
The depreciation notionally increased the balance sheet of the banks in naira based on their forex holdings giving them a sudden look of bountiful harvest.
The apex bank fears, that banks could be tempted to spend the profits making them vulnerable if the exchange rate strengthens.
In a letter to all banks dated September 11, 2023, titled “Impact of recent fx policy reforms: Prudential guideline to the banking sector” and signed by Haruna B. Mustapha, Director, Banking Supervision Department, the apex bank”, the CBN outlined the approved measures towards to ensure monetary policy stability and discourage the banks from engaging in operational excesses detrimental to the financial services sector.
In a proactive measure to safeguard against future adverse FX rate movements, banks are now mandated to set aside their foreign currency revaluation gains.
The CBN opines that these gains will serve as counter-cyclical buffers and cannot be utilized for dividend payouts or operating expenses.
The CBN has taken into account that the recent FX policy changes could lead to regulatory breaches such as exceeding Single Obligor Limits (SOL) and Net Open Position (NOP) limits.
As a mitigating measure, the central bank will grant forbearance to banks that surpass these limits due to the policy change, provided they apply for it.
This forbearance will be restricted to existing facilities as of the effective date of the new guidelines. See excerpts of the guidelines
The Bank thus approved the following prudential guidance and directives for immediate implementation by banks:
1. Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilize such FX revaluation gains to pay dividend or meet operating expenses.
2. Single Obligor Limit (SOL): Banks that inadvertently breach the Single Obligor
– Limit (SOL) due to the FX policy will be granted forbearance upon application to the CB. The forbearance shall apply only to existing facilities as at the effective date of this policy. Such banks shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.
3. Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application to the CBN.
4. Existing prudential regulations on capital adequacy, dividend payments and FCY borrowing limits shall continue to apply.
Analysts believe that, by this circular the CBN has compelled the banks to engage in a “counter-cyclical buffer” by saving the forex revaluation gains for future losses if the exchange rate goes down.
By this measure, banks are prevented from using the extra money they make from foreign currency revaluation to pay dividends or expenses.
This is called a counter-cyclical buffer.
Again, banks that have lent more than the allowed limit to one borrower because of the foreign currency policy can ask the CBN for a forbearance, that is a permission to keep the loan. The banks involved will not penalize them by CBN for breaking the limit, but only for loans that existed before the policy are considered.
Banks that have more foreign currency assets or liabilities than the allowed limit because of the foreign currency revaluation can also ask the Bank for forbearance. The Bank will not penalize them for breaking the limit either.
Banks should still follow the existing rules on how much capital they need, how much dividends they can pay, and how much foreign currency they can borrow.
The banks have been basking on a foreign exchange revaluation windfall that have seen them jump into exceptionally high growth in the second quarter.
There are fears that the good times may not last long following events that led to downgrading of Nigeria on the FTSE Russell equity indices.
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
