CBN extends banks’ foreign currency loan limit

Owing to the fall in the naira, which forced banks to violate foreign currency loan limits, the Central Bank of Nigeria (CBN) has extended the guideline to accommodate more borrowings.

The new regulation replaces a 2014 rule capping foreign borrowings, including Eurobonds at 75 per cent of shareholders’ funds as CBN tries to manage widespread capital shortfalls in banks, due to bad loans, especially.

“A major consequence of this development was the inadvertent breach of the regulatory limit for foreign currency borrowings by some banks,” the CBN said in the circular.

“To address this development, the aggregate foreign currency borrowing of a bank’s borrowing should not exceed 125 percent of shareholders’ funds.”

The new rules also prescribe 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 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. It later re-imposed a quasi-peg to avoid further currency loss, thereby creating multiple exchange rates, which has covered the pressure on the naira and stunted inflows as investors struggle to price naira assets.

With the sharp falls in the currency, banks have seen their dollar loan books swell in naira terms, the CBN said. This implies that they have to hold more capital in order to keep within a regulatory threshold of loan to capital ratio.

Banks raised over $1.5 billion from issuing Eurobonds and other types of debt instruments in 2013 as they rushed to lend to the once lucrative oil industry at the peak of crude prices before the 2014 price crash.

The CBN 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.

Yesterday, interbank lending rates rose sharply by around 100 percentage points, as commercial banks scrambled for cash to pay for bond purchases and cover their positions, traders said.

Overnight lending rates rose to around 300 percent from 200 percent at the end of Wednesday, as naira liquidity dried up in the banking system and some banks were forced to borrow from the CBN.

“The market is currently short of funds with major placers asking for a higher rate on their money as a result of pressure from those who need cash to cover their positions,” one trader said.

The CBN has consistently sold dollars at both the spot and forward markets, and required banks to pay for the purchase. This has drained liquidity in the market.

Source: Guardian

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