CBN Raises Banks’ FX Loan Limits to Resolve Breaches

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• Interbank rates rise on tight naira liquidity


The Central Bank of Nigeria (CBN) has increased the limit on banks’ foreign currency borrowings to 125 per cent of shareholders’ fund after some lenders breached its regulatory limit due to the recent fall in the naira, according to a document seen by Reuters.

The new regulation replaces a 2014 rule capping foreign borrowings, including Eurobonds, at 75 per cent 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.

“To address this development … the aggregate foreign currency borrowing of a bank borrowing should not exceed 125 per cent of shareholders’ funds,” CBN said in a circular.

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.

Following the drop in the value of the currency, lenders have seen their dollar loan books swell in naira terms, the central bank said. This implied 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.

Meanwhile, Nigerian interbank lending rates rose sharply by around 100 percentage points on Thursday, as commercial lenders scrambled for cash to pay for bond purchases and cover their positions.

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

The Debt Management Office (DMO) raised N105.32 billion from bond sales this week, and payment for the debt sale was due on Thursday, draining liquidity in the market and pushing further up the cost of money in the market.

“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 central bank 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.

The naira maintained its previous day’s value of N410 to the dollar on the parallel market on Thursday.

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