The World Bank has cautioned the Central Bank of Nigeria (CBN) to stop supporting undercapitalised banks in the country. According to a new report by the international financial institution, the support could deteriorate the assets of Nigerian commercial banks.
According to the report, the apex bank had supported four banks that were severely undercapitalised with liquidity without requiring recapitalisation plan. The World Bank warned that if CBN continues to operate with leniency in matters relating to undercapitalised banks, assets of the financial market will worsen.
The World Bank’s warning was contained in its Nigeria Economic Update.
“The CBN gave liquidity support to four medium-sized banks that were severely undercapitalised, without requiring hard time-bound recapitalisation plans.
“Going forward, asset quality needs to be closely monitored because it may deteriorate if the CBN continues to exercise regulatory forbearance for undercapitalised banks. Banks are performing better, but asset quality needs to be monitored closely,” the World Bank said.
The CBN had directed banks in July, to ensure a minimum loan-to-deposit ratio of 60 per cent by September 30, 2019. Any bank that fails to meet the directive – which is reviewed quarterly – additional cash reserve requirements on the shortfall will be imposed on it.
According to the World Bank, the economy could be impacted negatively by the measures because banks might begin to approve loans regardless of the level of risk exposure.
“It is possible that policy and regulatory efforts to stimulate commercial bank lending to selected private credit segments, while well-intentioned, could entail unintended negative consequences.
“Dropping the level of deposits for which the CBN would remunerate banks when using the Standing Deposit Facility could undermine its ability to control liquidity conditions in the banking system, and additional, potentially costlier open market operations would be required to drain liquidity,” the World Bank added.