CBN raises banks’ FX loan limits to resolve breaches

The Central Bank of Nigeria (CBN) has increased the limit on banks’ foreign currency borrowings to 125 percent of shareholders’ fund after some lenders breached its regulatory limit due to the recent fall in the naira, according to a circular seen by Reuters.
The new regulation replaces a 2014 rule capping foreign borrowings, including Eurobonds, at 75 percent of shareholders’ funds as Nigeria tries to manage widespread capital shortfalls at lenders due to a currency crisis and bad loans.
“A major consequence of this development was the inadvertent breach of the regulatory limit for foreign currency borrowings by some banks,” the central bank said in a circular.
“To address this development … the aggregate foreign currency borrowing of a bank borrowing should not exceed 125 percent of shareholders’ funds.”
The new rules also prescribes 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.
It directed lenders to report on their utilisation of foreign currency borrowings on a monthly basis.
Oil-producing Nigeria has been gripped by a shortage of dollars since crude prices plunged, triggering a currency crisis that left lenders and other companies struggling to purchase hard currency and battered investor confidence.
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 masked the pressure on the naira and stunted inflows as investors struggle to price naira assets.
With the sharp falls in the currency, lenders have seen their dollar loan books swell in naira terms, the central bank said. This implies that they have to hold more capital in order to keep within a regulatory threshold of loan to capital ratio.
Nigerian banks raised over $1.5 billion from issuing Eurobonds and other types of debt instruments in 2013 as lenders rush to lend to the once lucrative oil industry at the peak of crude prices before the 2014 price crash.
The central bank 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.
The International Monetary Fund (IMF) last month urged Nigeria to quickly increase the capital of undercapitalized banks and putting a time limit on regulatory forbearance but welcomed efforts to strengthen the banking sector.
Source: Reuters.