CBN warns banks against excessive accumulation of risks to boost asset profile

Central Bank of Nigeria
Central Bank of Nigeria

The Central Bank of Nigeria urges banks to establish proper management process in their operations.

The Central Bank of Nigeria, CBN, has warned banks against excessive concentration of credit risks in their asset portfolios to boost their capital adequacy profile.

Part of the factors that caused the recent crisis in the Nigerian banking industry were the systemic weaknesses which allowed operators to concentrate on certain products, business lines and legal entities, the collective exposure of which negatively affected the banking system.

But the Central Bank’s Director of Banking Operations, Tokunbo Martins, in a fresh circular to all banks and discount houses, underlined the importance of proper management of needs through the establishment of sound risk management processes in their operations.

Consequently, the apex bank said it has reviewed the risk weights assigned to some identified exposures, irrespective of its existing risk management control guidelines for banks and discount houses to check credit concentration risks.

According to Ms. Martins, the risk weight assigned to direct lending to local governments, states, government ministries, departments and agencies, MDAs has been raised from 100 to 200 per cent, while investments in Federal Government bonds would continue to attract zero per cent risk weight.

The same weight is not for state government bonds, which is expected to continue to attract a risk weight of 20 per cent, particularly those that meet the eligibility criteria spelt out in the guidelines for granting liquidity status.

Where the exposure to any economic sector, as defined by the International Standards Industrial Classification of Economic Sector as issued by the CBN, is above 20 per cent of the total credit facilities of the bank, the CBN said the risk weight of the entire portfolio would be 150 per cent.

Urging strict compliance to the directives, the CBN clarified that total exposure to a particular industry would cover-off balance sheet engagements in which the banks takes the credit risk, pointing out that all breaches of single obligor limits without prior approval by the CBN would be regarded as impairment to capital.

Similarly, the Central Bank said banks’ related entities in a holding company structure would include the financial holding company, FHC, and other subsidiaries within the group, for purposes of credit transactions, adding that such transactions would be treated as a loan liability.

On the other hand, the CBN said credit by a bank to its FHC would be regarded as a return of capital deductible from the capital of the bank while calculating its capital adequacy profile.

Banks lending to subsidiaries within its group is expected to assign a risk weight of 100 per cent where the credit is fully secured, otherwise should be deducted from the capital when calculating capital adequacy profile.