CBN raises banks’ FX loan limits to 125% of shareholders fund

Central Bank of Nigeria CBN has issued a foreign exchange loan guideline for banks in which it increased the limit of banks’ foreign currency borrowings to 125 per cent of shareholders’ fund. The move is to contain some banks that have breached its regulatory limit due to the recent fall in the vale of the Naira. Banks with foreign currency denominated loans in their books have suddenly found their loan portfolio swell in terms of Naira equivalent of the loan amount.
The new guideline replaces a 2014 rule capping foreign borrowings, including Eurobonds, at 75 per cent of shareholders’ funds. “A major consequence of this development was the inadvertent breach of the regulatory limit for foreign currency borrowings by some banks,” the central bank said in a circular.
“To address this development the aggregate foreign currency borrowing of a bank borrowing should not exceed 125 percent of shareholders’ funds.”
The new rules also prescribes that all foreign borrowing should be hedged through the financial markets and debt should have a minimum of five year maturity except for trade lines.
The CBN in the new rule directed banks to report on their utilisation of foreign currency borrowings on a monthly basis.
It will be recalled that the Naira lost around a third of its official value last year after the central bank lifted its dollar peg to float the currency on the interbank market.
With the sharp falls in the currency, banks have seen their dollar loan books swell in Naira terms, the central bank said. This implies that they have to hold more capital in order to keep within a regulatory threshold of loan to capital ratio.
Nigerian banks raised over $1.5 billion from issuing Eurobonds and other types of debt instruments in 2013 as banks rush to lend to oil industry at the peak of crude prices before the 2014 price crash.
The central bank has been trying to curb pressures on the Naira from excess demand for dollars. It also wants to help avoid widespread capital raises for the banking industry given the weak equity markets and expensive debt market yields.
The International Monetary Fund (IMF) last month urged Nigeria to quickly increase the capital of undercapitalised banks and putting a time limit on regulatory forbearance but welcomed efforts to strengthen the banking sector.