In a communique issued by the CBN and signed by Tokunbo Martins; the director Banking Supervision, banks in the country have been directed to make provisions for foreign currency denominated loans. This is informed by the impact of the higher exchange rate on banks’ operations. CBN noted that the liberalization of the foreign exchange (forex) market has led to the increase in balances on Forex denominated loans and advances in the books of banks.
The most affected facilities 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 are expected to rise above 12 per cent, which is way higher than the five per cent regulatory limit.
The recent liberalization of the foreign exchange market is a measure to reduce the burden on the dwindling external reserves and to increase dollar inflow through foreign direct investments. The CBN had reviewed the 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 resultant crash in the value of naira resulted in 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 showed 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’s 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 provisioned 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.
Source: http://leadership.ng/