NPLs: CBN Directs Banks to Make Provision For FX Loans

As the impact of the higher exchange rate begins to bear on banks’ operations, the Central Bank of Nigeria (CBN) has directed all banks in the country to make provisions for foreign currency denominated loans.
A circular issued by the apex bank and signed by the Director Banking Supervision, Tokunbo Martins noted that the liberalization of the foreign exchange market, has lead to the increase in balances on foreign currency-denominated loans and advances in the books of banks.
She noted that most affected were facilities that had been fully provided for under the previous exchange rate regime, but were yet to be written off in line with extant regulation under Section 3.21(a) of the Prudential Guidelines for Deposit Money Banks in Nigeria of July 1, 2010.
Increasing loan impairment had affected profitability of banks as non performing loans continued to rise. Non performing loans in the sector is expected to rise above 12 per cent which is way higher than the five per cent regulatory limit.
The CBN had liberalized the foreign exchange market in an effort to reduce the burden on the external reserves and stimulate dollar inflow through foreign portfolio investments. It had issued the the Revised Guidelines for the Operations of the Nigerian Inter-bank Foreign Exchange Market on June 15, 2016 to enhance efficiency, facilitate liquidity and transparency in the foreign exchange market, the CBN issued.
This had however seen the value of the naira crash from N197 which it had been pegged at to about N330 to the dollar, a situation that has led to a rising default of loans. Half year 2016 results of FBN Holdings, Union Bank, Fidelity Bank, Wema Bank, Sterling Bank, Ecobank Transnational, FCMB and Diamond Bank show a 148 per cent rise in impairment made on loan losses which rose from N71.354 to N177.26 billion for the eight banks.
The apex bank the circular noted that the directive was to ensure adequate and proper provisioning for the loans. “Banks are by this circular, required to ensure that the unprovisioned portion on all such facilities are fully provided for immediately in the income statements and evidence of the additional provisions forwarded to the Director of Banking Supervision within one week of the date of this circular.
“Additionally, all foreign currency-denominated loans should be reviewed and adequate provisioning made on all delinquent ones in line with the Prudential Guidelines for Deposit Money Banks in Nigeria of July 1, 2010” the circular read.

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