New Capital Rules For Banks

The proposed new requirement is desirable

Over the past few decades, there has been a deluge of bank
failures in Nigeria mostly occasioned by a cocktail of factors,
chief among which are non-performing loans (NPLs).

These essentially are toxic items that arise from insider abuses
often perpetrated by the top echelon in the banking sector, in
collaboration with others outside the system. This is why the move
by the Central Bank of Nigeria (CBN) to introduce new capital rules
in the second quarter of the year must be applauded. With the
proposed rules, it is apparent that the CBN is moving to align with
the global agreement reached a couple of years ago in Basel,
Switzerland—otherwise known as ‘Basel Three’.

Figures from the National Bureau of Statistics (NBS) indicate
that the NPL in the nation’s banking sector rose to N2.245 trillion
in the third quarter of 2018, from N1.938 trn in the second
quarter, representing about 40 per cent of the N8.7 trn 2019
federal budget. The ratio of NPLs also rose to 14.16 per cent in
the third quarter from 12.45 per cent in the previous quarter, far
above the CBN’s threshold of five per cent. In the same vein, the
Nigeria Deposit Insurance Corporation (NDIC) said the risk assets
examination of 20 deposit money banks (DMBs) as at 31st December
2016 revealed a total industry loans portfolio of N15.6trn, with
the sum of N3.1trn (or 19.91 per cent) non-performing. “The 19.91
per cent NPL ratio was a 79.04per cent increase over the average
industry ratio of 11.12 per cent recorded as at December 31, 2015,”
NDIC said.

While many banks have gone under and several others bailed out
with hundreds of billions of public funds, the sharp increase in
bad debts over the years calls for stringent measures and tougher
capital rules. It is trite that the story of bank failures in
Nigeria has been largely that of bad and doubtful loans,
exacerbated by a not-too-tidy supervisory oversight by the
regulatory bodies. Despite the fact that the CBN’s Monetary Policy
Committee (MPC) had in recent times been expressing serious concern
about the rising NPLs in the financial system, the apex bank has
not done enough to exercise supervisory oversight in that
direction. In our view, allowing NPLs to balloon from the
permissible five per cent threshold to14.16 is both untidy and
unacceptable.

In the wake of the failure of Skye Bank for which the management
and board members were asked to resign, the Minister of Finance,
Zainab Ahmed, had expressed serious concerns over the rising
incidence of NPLs in Nigerian banks. She urged the financial sector
regulatory authorities to use the defunct Skye Bank as a test case
in order to restore confidence in the system. We align with the
minister’s position. This, however, should not be restricted to the
defunct Skye Bank, but all bank failures in the last few decades.
At times, the NDIC has been caught up in the controversy over legal
actions against managers and others who have caused banks’
failures. This should not be so, going forward.

It is noteworthy that many men and women of influence, both in
the public and private sectors, are behind NPLs and the attendant
bank failures. All they got was at best a slap in the wrist while
hundreds of billions of public funds have been channelled into
bailing out the banks they ruined. Yet, irrespective of social
status or class, anyone with direct or indirect link to bank
failures should face the music. It is our expectation that the
proposed new capital rules by the CBN will address those lapses
that encourage the growth of NPLs, sundry insider abuses and laxity
in the banking industry.

Culled from Thisday