The Central Bank of Nigeria has issued new directives on lending guidelines involving Deposit Money Banks, Financial Holding Companies and other subsidiaries within the group.
The CBN said in a circular on Tuesday that credit by a bank to its HoldCo would be regarded as a return of capital and deducted from the capital of the bank in computing its capital adequacy.
It added that bank lending to subsidiaries within its group where the credit was fully secured would be assigned a risk weight of 100 per cent, otherwise it would be deducted from the capital when computing capital adequacy.
Meanwhile, the apex bank has reviewed weights associated with banks and discount houses’ exposure to risk through the establishment of sound risk management processes.
The CBN said that it had identified that recent crisis in the banking industry had highlighted several weaknesses in the banking system.
“A major contributor was the excessive concentration of credit in the asset portfolios of banks, adding that such concentration cut across products, business lines and legal entities, among others,” it said.
It, therefore, urged banks to properly manage the concentration through the establishment of sound risk management processes.
The CBN said it had increased the risk weight assigned to direct lending from 100 per cent to 200 per cent to aid the management of the concentration.
It said, “The increment is for the direct lending to local governments, states, ministries, departments and agencies of governments. Investments in Federal Government bonds should continue to attract zero per cent risk weight, while state government bonds will remain at 20 per cent.”
The CBN noted that where the exposure to any industry was in the excess of 20 per cent of the total credit facilities of a bank, the risk weight of the entire portfolio would be 150 per cent.
It added, “The total exposure to a particular industry will include off-balance sheet engagements in which the bank takes the credit risk. All the breaches of single obligor limits without the prior approval of the CBN should be regarded as impairment to capital.”
The CBN said that for the purposes of credit transactions, banks’ related parties within a holding company structure should include the HoldCo and other subsidiaries within the group.