Banks to restrict forex denominated loans to customers

By Odunewu Segun

Following the continuous depreciation of the naira and rise in foreign currency exposures of banks in naira terms, the Central Bank of Nigeria, CBN, has instructed commercial banks in the country to henceforth desist from giving foreign denominated loans to customers who do not earn foreign exchange.

Director of Banking Supervision for the CBN, Mrs. Tokunbo Martins, revealed this on Tuesday, October 18, at the CBN-Financial Institutions Training Centre (FITC) continuous education programme for Directors of Banks and Other Financial Institutions, held in Lagos.

She said the currency depreciation, which intensified following the introduction of the flexible exchange regime, had increased the loan repayment obligation of borrowers and threatened their capacities to meet contracted loan repayments. “Banks may, therefore, need to restrict extending foreign currency denominated loans to customers that do not earn foreign exchange,” she said.

Speaking on the theme: Current Regulatory Requirements and their Implications, Mrs. Martins said the CBN introduced the flexible forex policy to address the challenges experienced in the forex market.

“The objective of the new regime is to enhance efficiency and facilitate a liquid and transparent Foreign Exchange Market. It is pertinent to note that, although the regime is flexible, CBN intervention in the inter-bank market is allowed, and can be direct or through dynamic secondary market mechanisms,” she said.

“One of the fallouts of the flexible exchange rate regime is increase in volatility in forex market, resulting in heightened exposure of banks to foreign exchange risk. Consequently, banks may need to tighten their controls and monitor their foreign currency positions more closely,” she stated.

Martins who also spoke on Treasury Single Account (TSA) implementation said the TSA regime precipitated some unintended consequences, affecting the operations of banks, especially regarding deposit depletion, asset quality, decrease in revenues and liquidity stress.

According to her, the aggregate deposit transferred to the CBN from the inception of the TSA regime to March 2016 was N2.67 trillion. This sum, which represents 15.14 per cent of the total deposits of commercial banks of N17.63 trillion as at April 30, constitutes the volume of deposits “lost” by banks as a fallout of the implementation of the TSA regime