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Wednesday, 27 November 2013
Growing banks’ exposure to power, oil sectors to increase concentration risk
Increased lending by banks to the power and oil sectors of the economy may portend concentration risk for financial operators, according to industry watchers. To this end, there is a stir of anxiety among the banking public as failure in the sectors may adversely affect the fortunes of lender banks.
Analysts say the current growing exposure to the power and oil sectors is at variance with extant regulations guiding loans and credit, which calls for urgent attention from the Central Bank of Nigeria (CBN).
BusinessDay gathered that the development is in contravention of CBN laws that forbid concentration of risks beyond certain limits, particularly through the single obligor limit of 20 percent of shareholders’ funds and the macro-prudential risk which addresses sectorial concentration.
Single obligor limit is the maximum amount a bank is allowed to lend a single borrower or an individual in relation to the total shareholders’ fund of that bank. Macro-prudential regulation, on the other hand, concerns approach to financial regulation aimed to mitigate the risk of the financial system as a whole so as to reduce the risk and the macro-economic costs of financial instability.
Consequently, sources close to CBN say the regulator has expressed concern over the development and will take action any moment from now.
It would be recalled that local banks financed about 70 percent of the over $3.3 billion privatisation of the power sector, an exposure, analysts say, is too high for comfort, going by the capital the lenders carry.
Currently, the banks are also involved in high level discussions with prospective buyers of the oil blocs put up for sale by Chevron and Shell, which they are expected to fund. The worth of the oil blocs is being put at a conservative figure of N6 billion.
BusinessDay gathered that economic watchers and depositors alike are getting worried over the trend which they consider as crowding out other sectors, especially real and manufacturing.
Although CBN has designated some eight banks – FirstBank, Zenith, GTBank, UBA, Access, Diamond, Ecobank and Skye Bank – as ‘too big to fail’, saying they would as such be closely monitored and scrutinised to ensure they are healthy all the time, analysts say sectorial over-exposure should be addressed by the CBN.
“CBN is currently weighing arguments for and against lowering or increasing the 20 percent obligor limit. One thing that is sure is that CBN will review and commence full compliance of the single obligor limit and the prudential regulation any moment from now,” a source told BusinessDay.
“It is not enough to protect some banks from likely failure, but the ultimate systemic stability should be uppermost in the way the CBN manages the financial system,” the source added.
The development is coming on the heels of warning of dangers over the postponement of budget presentation few weeks to the beginning of the 2014 fiscal year.
“It does serve as a reminder of the risks that the political backdrop might pose to economic outcomes in Nigeria. If no political consensus is achieved, the risk is that we see further delays to both the passage and implementation of the 2014 budget. This would contribute to uncertainty, and most likely, a slowdown in spending – contributing even more to the cyclical slowdown that appeared to be underway from the H1 GDP data,” says Razia Khan, analyst at Standard Chartered Bank, London, adding that at a time when the challenges facing the Nigerian economy are rising, anything that contributes to uncertainty, such as a delay to the 2014 budget, will sit uneasily with investors.