World Bank warns CBN against support for undercapitalised banks

0 109

The World Bank has warned that the assets of Nigerian commercial banks may deteriorate if the Central Bank of Nigeria continues to support undercapitalised banks.

The World Bank gave the warning in its latest Nigeria Economic Update.

- Advertisement -

In the comprehensive report, which was obtained by our correspondent, the World Bank advised the CBN to monitor the quality of the assets of Nigerian banks ‘closely’.

The World Bank specifically expressed reservations about the manner in which the CBN extended liquidity support to four undercapitalised banks.

“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.

- Advertisement -

The bank observed that non-performing loans, mostly in the oil, gas, and power sectors, declined from 12.4 per cent in June 2018 to 9.4 per cent in June 2019.

However, it noted that the decline was driven by write-offs and clearance of oil-sector-related arrears that improved the cash flow of bank borrowers so they could repay banks and sale to asset management companies.

The World Bank also expressed reservations about measures introduced by the CBN to encourage banks’ lending to the private sector, which had been negative since 2017 but rose to -0.2 per cent in June 2019, year-on-year.

The CBN had via a circular issued on July 3 instructed banks to ensure a minimum loan-to-deposit ratio of 60 per cent by September 30, 2019.

Adherence to the LDR was to be reviewed quarterly, and failure to meet the requirements would result in the imposition of additional cash reserve requirements on the shortfall.

- Advertisement -

The World Bank warned that the measures could have negative impact on the economy.

It said, “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.”

It further warned that the development could lead banks to shift funding modalities away from mobilising deposits, which would undermine financial inclusion initiatives.

Get real time updates directly on you device, subscribe now.

Comments
Loading...
AllEscort