By Omoh Gabriel, Business Editor
LAGOS â€” THE Central Bank (CBN) on Friday instructed banks in the country to limit loans to the public sector to 10 per cent
of their overall credit portfolios, an apparent effort to divert more funds to the private sector.
In a circular to banks, theÂ CBN said where the existing credit limit to the public sector had exceeded 10 per cent, it
should be brought down to the new maximum limit by the end of the year.
This has a far reaching implication for the 2009 budget which the Federal Government planned to part-finance from domestic money market. The 2009 budget has a deficit of over one trillion which the government hopes to finance through short term borrowing from banks. By this development, the three tiers of government may have to look outside the banks for financing.
Some state governments are already heading to the bond market for long term financing through public offer.
The circular entitled: “Lending To All Tiers Of Government And Their Agencies” reads in part, â€œOur circular reference number BSD/03/2002 of April 15, 2002 on â€œgranting of credits to all tiers of government and their agenciesâ€ requiring banks to make provision of 50 per cent and 100 per cent for performing and non-performing credits, respectively is hereby revised as follows:
”Banks are now to apply the normal provisions of the prudential guidelines to all public sector credits. However, a maximum limit of 10 per cent of the total credit portfolio should be placed on public sector credits, both on-and-off Balance Sheet.
â€œWhere the existing credit limit to the public sector has exceeded the prescribed maximum limit of 10 per cent, it should be brought down to the maximum limit of 10 per cent by December 31, 2009.
CBN to sanction defiants
”Banks are reminded of the history of non-performing public sector credits, and are therefore strongly advised to exercise caution and set a more conservative threshold to avoid the mistakes of the past.
”The Central Bank of Nigeria will be constrained to reintroduce measures to curb public sector loans if banks do not put in place appropriate measures to avoid excessive exposure to the sectorâ€.
The directive comes two weeks after Mallam Sanusi Lamido Sanusi took over as the apex bank governor.
Sanusi, who built a reputation for strong corporate governance and conservative lending strategies at First Bank, has made improving banking supervision and disclosure in Nigerian banking sector a priority.
Investigation showed that many banks in Nigeria lent short-term to the 36 state governments ahead of elections in 2007, in some cases saddling themselves with debts which were not repaid.
â€œBanks are reminded of the history of non-performing public sector credits and are therefore strongly advised to exercise caution and set a more conservative threshold to avoid the mistakes of the past,â€ the circular added.
Private sector credit outstripped government spending in Nigeria for the first time last year, making the banking system the key driver of growth in theÂ nationâ€™s economy.
But risk management and disclosure levels have not kept pace with explosive balance sheet growth since consolidation in the sector four years ago, fuelling mistrust between counter- parties.
Credit to private sector growÂ by 3%
The global economic meltdown has also led to a reduction in foreign credit lines and higher risk provisioning for non-performing loans, contributing to a tightening of liquidity.
Banking sector credit to the private sector grew just 0.3 per cent to around N8 billion naira in the first quarter of the year, according to central bank figures, compared to around 25 per cent growth in the same period of 2008.
Sanusiâ€™s pledge to tighten banking supervision has not been welcomed all round.
An announcement that the Central Bank and the Nigerian Deposit Insurance Corporation (NDIC) are auditing Nigeriaâ€™s 24 banks to ascertain their margin loan exposure, a long concern for investors, has prompted a sell-off in the stock market.
Banking stocks have led the Nigerian all-share index to go down 10 per cent this week, wiping N642 billion from its market capitalisation, as investors worry about what the audit might uncover.
Interbank lending rates rise
Meanwhile Nigerian interbank lending rates climbed to 16.25 per cent last week from 14.25 per cent last as major banks held back funds to balance their books ahead of quarterly and full-year financial reports, traders said.
The secured Open Buy Back (OBB) rate was unchanged at 7.75 per cent, lower than the central bankâ€™s benchmark Monetary Policy Rate (MPR) of 8.0 per cent.
Overnight placement jumped to 20 per cent from 17 per cent, while call went up to 21 percent from 18 per cent last week.
â€œSome major placers of funds withdrew from the market this (last) week, leaving many funds takers scrambling for cash,â€ one dealer said.