CBN makes U-turn on new guidelines

VANGUARD Newspaper- Babajide Komolafe

ABUJA — The Central Bank of Nigeria, CBN, has backpedalled on its directive that banks should disclose executive compensation and bonuses in their annual accounts.
The apex bank, last week, issued a new prudential guidelines which replaced the one issued in May which mandated banks to disclose in their annual accounts monies paid to executives and staff as compensation, profit sharing and bonuses.

Also deleted from the new prudential guidelines is the limit on credit to directors and significant shareholders and the general provisioning of one per cent for all loans.

The new prudential guidelines was announced by the Director of Banking Supervision, CBN, Mr. Samuel Oni, via a circular entitled: “New prudential guidelines for deposit money banks.”

The circular stated: “ We forward herewith, the final copy of the approved prudential guidelines for deposit money banks in Nigeria.

The document which details new prudential guidelines and loan loss provisioning requirements takes effect from July 2010. Banks are required to be guided by the guidelines. Please note that this document supercedes the one earlier issued dated May 5, 2010.”

Vanguard had exclusively reported that there was a groundswell of opposition to some sections of the previous guidelines which operators labelled impracticable and that the apex bank had agreed to review the guidelines.

CBN deletes 38 subsections

Analysis of the new guidelines reveal that the apex bank gave in to the demand of the banks by deleting 38 subsections which were strongly opposed by the banks. In fact, the apex bank deleted all the sections on Regulations for Auto Financing, Regulations for Credit Cards and Regulations for Housing Finance.

Major deletions

The major deletions from the new guidelines are as follows:
3.3 Limit on portfolio concentration
(a) All banks must ensure that they have policies in place to address portfolio concentration and the policies must be strictly adhered to;

(b) The portfolio limit for a sector/industry rated BB and below should not exceed 10 per cent of the total loan portfolio;

(c) The portfolio limit for unrated sector/industry with exception of SME should not exceed 5 per cent of total portfolio; (d) The guidance on credit ratings is provided under section 3.24.

3.4 Limit on “Specialized loans” exposure:

(a) The total “Specialized loans” of a bank shall not exceed 20 per cent of total loan portfolio net of provision of the bank and including off balance sheet engagement;

(b) Prior approval of the CBN shall be obtained for excess above the limit prescribed in 3.4 (a) above; (c) Any excess over 20 per cent prescribed limit without the CBN approval shall be subject to full provision and should be part of general provisions on a quarterly basis.

3.5 Limit on exposures to directors and significant shareholders:
(a) A significant shareholding is defined as a holding of at least 5 per cent (individually or in aggregate) of bank’s equity;

(b) A director or a significant shareholder should not borrow more than one per cent of a bank’s share capital except with the prior approval of the CBN; (c) The maximum credit to all insiders should not exceed 10 per cent of share capital;

(d)For the purpose of 3.5(b) and 3.5(c), the share capital shall be made up of paid up share capital and share premium; (e) Insiders include directors, significant shareholders and employees.

The term “director” includes director’s wife, husband, father, mother, brother, sister, son, daughter and their spouses; (f) The provisions of this section supersede the provisions of circular BSD/9/2004 on large exposure and connected lending.

3.7 Limit on contingent liabilities
(a) Contingent liabilities include the following: (i) direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of credit serving as financial guarantees for loans and securities), and acceptances (including endorsements with the character of acceptances);

(ii) certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and standby letters of credit related to particular transactions;

(iii) short-term self liquidation trade related contingencies (such as documentary credits collateralized by the underlying shipments);

(iv) sale and repurchase agreements and assets sales with recourse,where the credit risk remains with the bank;

(v) forward assets purchases, forward deposits and partly_paid shares and securities, which represent commitments with certain draw down;

(vi) note issuance facilities and revolving underwriting facilities; (vii) other commitments (e.g. formal standby facilities and credit lines) with an original maturity of over one year;

(viii) similar commitments with an original maturity of up to one year, or which can be unconditionally cancelled at any time.

(b) A bank’s total exposure on contingent liabilities should not be more than 150 per cent of its shareholders’ funds unimpaired by losses.

3.12 Linkage between financial indicators of the borrower and total exposure from financial institutions:

(a) While granting any exposure, banks shall ensure that the total exposure (on balance sheet and off balance sheet) availed to any borrower from banks does not exceed 10 times of borrower’s shareholders fund as disclosed in its financial statements.

This provision shall take into cognizance, the provision of single obligor limit.

(b) It is expected that at the time of allowing fresh exposure/enhancement/renewal, the current assets to current liabilities ratio of the borrower shall not be lower than 1:1; (c) Facilities granted based primarily on the separate cash flows of the project are exempted from (a) and (b) above but are also subject to the provision of single obligor limit.

3.14 Payment of dividend:

(a) No bank shall pay dividend on its shares until: (i) all its preliminary expenses, organisational expenses, shares selling commission, brokerage, amount of losses incurred and other capitalized expenses not represented by tangible assets have been completely written off;

(ii) adequate provisions have been made to the satisfaction of the CBN for actual and contingent losses on risk assets, liabilities, off balance sheet commitments and such unearned incomes as are deliverable there from; (iii) it has complied with all capital ratio requirement as specified by the CBN.

3.15 Limit of Investment in fixed assets:

The maximum amount which a bank can invest in fixed assets is 25 per cent of its shareholders’ funds unimpaired by losses.

3.19 Loans to deposits ratio:
All banks shall maintain a loan to deposit ratio of not more than 80 per cent.
4.3 Disclosure of Executive Directors’ compensations, bonuses, profit sharing arrangements and share options:

(a) All compensations and bonuses paid or payable to executive directors of all banks including profit sharing arrangements and share options should be fully disclosed in the annual audited financial statements;

(b) All banks are also required to disclose any profit sharing arrangements and share options with the bases for their computations in their audited financial statements. If there are no such arrangements, a statement declaration should be made in the financial statements in this respect;

(c) All compensation including bonuses, profit sharing and share options should be disclosed as a separate component of operating expenses; (d) Practices whereby executive compensations including bonuses and profit sharing arrangements and share options are charged to inappropriate accounts are prohibited.

(e) The disclosure requirements in 4.3(a) to 4.3(d) also relate to staff bonuses, profit sharing arrangements and share options.

8.3 Personal Guarantees:

All facilities, except those secured against liquid assets, extended to SMEs shall be backed by the personal guarantees of the owners of the SMEs. In case of limited companies, guarantees of all directors other than nominee directors shall be obtained.

8.4 Leverage ratio for SME:

The total amount of facilities to an SME by an individual bank should be within a leverage ratio of 1:4 of the SMEs’ capital base. An SME leverage to the total industry shall not be more than ratio 1:10.

15.4 General Provision
Banks should make general loan loss provisions of at least 2 per cent of loan portfolio not specifically provided for, in addition to specific provisions, to provide against the unidentified losses which are known to exist in any portfolio using a systematic method which should be consistently followed from period to period.


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