STATES IN FRESH TROUBLE OVER DOMESTIC DEBTS

• CBN raises lending stakes

DO you desire to be a state governor in the next round of elections in the country? You had better stop, check and cross-check, because you might just be courting a serious migraine or working up your blood pressure to a stroke level over the level of indebtedness to money-deposit banks; local contractors; pension and gratuity arrears; government-to-government liabilities; and indeed even over the ability to pay wages of workers.

To make matters worse for the states, the Central Bank of Nigeria (CBN) on January 31, 2013 warned money-deposit banks in the country against the continued lending of credit to states, local councils and their agencies because of the risk implication. Specifically, the apex bank raised the risk rating from 100 per cent to 200 per cent.

The action, no doubt, followed the outcome of the Domestic Debt Data Exercise for the states in the country by the Debt Management Office (DMO) earlier in December 2012, which revealed a frightening exposure of banks to states.

According to the report which is to be deliberated on by the DMO Board Monday, which had been obtained exclusively by The Guardian two weeks ago, banks’ exposure to states as at end of June 2012 had grown from N346.968 billion in December 2011 to N395.741 billion, representing the highest percentage of 33.37 per cent of the entire debt stock, closely followed by contractors’ liabilities at 32.31 per cent at N383.169 billion.

A thorough look at the report indicates that Lagos State has the highest exposure of N83.001 billion commercial bank loans portfolio. However, her indebtedness to contractors is very low at just N537.75 million as at end of June 2012. It is followed in terms of commercial bank loans exposure by Imo State that has just grown her level of borrowings from the sector to N29.892 billion from a stock of N3.640 billion in December 2011.

Cross River State is third with banks’ credit of N25.941 billion; contractors’ pending bill of N31.908 billion; government-to-government liability of N22.341 billion; and another stock of liabilities classified as ‘others’ put at N16.353 billion.

Also greatly indebted to commercial banks is oil-rich Bayelsa and Rivers States. Bayelsa is owing the banks N19.300 billion and contractors N92.307 billion while Rivers’ exposure to banks is N18.497 billion and another higher stock of N86.755 billion to contractors that have delivered services and have been certified.

Kaduna State is one of the few in the North that is highly exposed to bank’s credit. It is indebted to the tune of N19.494 billion and is equally owing her contractors N6.777 billion.

Oil-rich Delta State too has a bank loan portfolio of N18.164 billion and contractors’ debt stock of N14.582 billion while Kwara has a commercial bank’s loan stock of N12.152 billion.

Akwa Ibom is the only state in the South-South zone that has not contracted any bank loan as at end of June 2012, though the state is owing contractors a huge debt stock of N41.092 billion.

Most of the states in the North-West and North-East, except Bauchi State, are either not indebted to banks or owing below N5 billion.

However, in what appeared as a move to avert a repeat of the margin loan phenomenon in the Nigeria Stock Exchange (NSE), the CBN, which is equally an institutional board member of the DMO, quickly warned banks to watch the trend.

The directive is contained in a circular by its Director of Banking Supervision, Mrs. Agnes Tokunbo Martins, via a Circular “BSD/DIR/GEN/LAB/06/003 of January 31, 2013 to all banks and discount houses review of risk weights on certain exposures in the computation of capital adequacy.”

The circular reads in part: “The recent crisis in the Nigerian banking industry highlighted several weaknesses in the system, key of which was the excessive concentration of credit in the asset portfolios of banks. Past experience revealed concentrations across products, business lines, and legal entities. The management of concentrations, or pools of exposures, whose collective performance may potentially affect a bank negatively, needs to be properly managed through the establishment of sound risk management processes.

“Without prejudice to the risk management control functions put in place by banks and discount houses to mitigate credit concentration risks, the Central Bank of Nigeria, in line with its risk-based supervisory review process, has reviewed the risk weights assigned to some identified exposures as follows:

“• The risk weight assigned to direct lending to local councils, states, ministries, departments and agencies of governments (MDAs) is increased from 100 per cent to 200 per cent.

“• Investments in Federal Government of Nigeria Bonds shall continue to attract zero per cent risk weight. However, state government bonds, that meet the eligibility criteria set out in the Guidelines for Granting Liquidity Status for State Government Bonds, would continue to be risk weighted at 20 per cent.

“• Where the exposure to any industry economic sector (as defined by the International Standard Industrial Classification of Economic Sector as issued by the CBN) is in excess of 20 per cent of the total credit facilities of a bank, the risk weight of the entire portfolio shall be 150 per cent. Total exposure to a particular industry would include off-balance sheet engagements in which the bank takes the credit risk.

“• All breaches of single obligor limits without the prior approval of the CBN shall be regarded as impairment to capital.

“• For the purposes of credit transactions, banks’ related parties within a holding company structure shall include, among others, the financial holding company (FHC), and other subsidiaries within the group. Credit transactions by the bank within the group would be treated as follows:

“• FHC lending to a bank within its group – the bank should treat the loan as a liability.

“• Credit by a bank to its FHC – this would be regarded as a return of capital and deducted from the capital of the bank in computing its capital adequacy.

“• Bank lending to subsidiaries within its group – where the credit is fully secured, it would be assigned a risk weight of 100 per cent, otherwise it would be deducted from the capital when computing capital adequacy.”

“All banks and discount houses are required to ensure compliance with this directive immediately.

“Please, be guided accordingly, “the circular further warned.

Source: Guardian