The World Bank has warned the Central Bank of Nigeria against its extended liquidity support to undercapitalised banks, cautioning that it could affect the asset quality of commercial banks in the Nigerian banking sector.
The World Bank issued the warning in its latest Nigeria Economic Update.
According to the Bretton Woods institution, the manner of support for four undercapitalised banks by the CBN gives cause for concern as Nigeria’s apex bank did not consider plans for tougher times.
The World Bank advised the CBN to monitor the quality of the assets of Nigerian banks ‘closely’.
“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 World Bank also expressed reservations about measures introduced by the CBN to encourage banks’ lending to the private sector, which had been negative since 2017 but rose to -0.2 per cent in June 2019, year-on-year.
The CBN had, via a circular issued on July 3, directed banks to ensure a minimum loan-to-deposit (LDR) ratio of 60 per cent by September 30.
Failure to meet the requirements of the LDR ratio, according to the apex bank, would result in the imposition of additional cash reserve requirements on the shortfall.
But the World Bank warned that the measures could have a negative impact on the economy.
“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,” the report read.
“For example, the minimum LDR requirement could lead banks to approve loans that expose them to more risky credits, undermining the quality of their loan portfolios.”
It further warned that the development could lead banks to shift funding modalities away from mobilising deposits, which would undermine financial inclusion initiatives.
The World Bank also warned against the CBN’s subsidised grants to firms in agriculture and manufacturing, especially micro, small, and medium-scale enterprises, noting that it could have adverse consequences.
“The CBN interventions could undermine the effectiveness of the credit transmission channel of monetary policy and the signalling role of changes in the Monetary Policy Rate.
“The interventions could crowd out private-sector funding by discouraging banks from venturing into under-served markets without subsidies when the schemes are not properly targeted, as well as creating expectations for borrowing at single-digit rates,” the report read.
The World Bank said the interventions could lead to a conflict of interest for the CBN between its oversight role in the banking sector, its objectives as an operator of development financing schemes and its interests as a shareholder in development finance institutions.
It added that the development could equally reduce the CBN’s operational surpluses, a share of which was normally transferred to the Federal Government as part of its independent revenue.