CBN Relaxes Credit Restrictions on Banks


By Emele Onu, 07.11.2010 


The Central Bank of Nigeria (CBN) has removed some of the restrictions it imposed on the credit operations of banks by amending relevant portions of the Prudential Guidelines that became effective May 1, this year.


Going by the new Prudential Guidelines circulated to banks last week by the banking watchdog, which became effective from July 1, banks have been given the leeway to determine their credit policies, but subject to specified directives and CBN’s supervision.The subsisting guidelines expunged such previous directives that states the top 50 exposures of a bank should not be more than 50 per cent of the total loan portfolio and must be in at least 10 different sectors and industries; that the portfolio limit for a sector or industry rated BB and below should not exceed 10 per cent of the total loan portfolio of a bank.


The other directives now cancelled, states that the portfolio limit of a bank for unrated sector or industry with exception of SME should not exceed 5 per cent of total portfolio; that a director or a significant shareholder should not borrow more than 1 per cent of a bank’s share capital except with the prior approval of the CBN and third that the maximum credit to all insiders should not exceed 10 per cent of bank’s share capital.


The CBN in the new guidelines signed by its Director of Banking Supervision, Mr. Samuel Oni, directed banks to put in place effective internal policies, systems and controls to identify, measure, monitor, and control their credit risk concentrations. It stressed that the policies should be approved by the Board of Directors and should cover the different forms of credit risk concentrations to which a bank may be exposed.


It further stated that a bank’s framework for managing credit risk concentrations should be clearly documented and should include a definition of the credit risk concentrations relevant to the bank and how these concentrations and their corresponding limits are calculated, with limits defined in relation to a bank’s capital, total assets or, where adequate measures exist, its overall risk level.


On the exposure of directors, the CBN stated that a director, insider and significant shareholder credit exposure should be fully disclosed by banks in their financial statements and returns prescribed by the CBN. It directed banks to ensure that their credit policies specifically address lending to directors as part of related parties or insiders lending policies. “A bank’s management should conduct periodic stress tests (on a quarterly) of its major credit risk concentrations and review the results of those tests to identify and respond to potential changes in market conditions that could adversely impact the bank’s performance.


“All banks should put in place policies on credit Portfolio Plan as part of their credit risk management, which should be approved by their respective boards. The plan shall specify the target portfolio size as well as portfolio distribution by industry, economic sectors, business units etc. In defining the portfolio concentration limits for industries or sectors, banks shall adopt the standard industry classification (SIC) definition recently developed and released by the CBN,” the apex bank said.


The CBN said it will assess the extent of a bank’s credit risk concentrations, how they are managed and the extent to which the bank considers them as part of subjective factors in making specific provisions.The CBN warned that non-compliance with a bank’s established policies on credit concentration and monitoring shall form a basis for supervisory actions, which may include additional loan loss provisions.






Comments are closed.