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CBN unveils guidelines on interbank loans

By Babajide Komolafe
LAGOS — COST of funds rose in the interbank money market yesterday to 23.5 per cent even as the Central Bank (CBN) unveiled conditions for the guarantee of interbank loans and deposits of Pension Fund Administrators (PFAs).

Last week, the CBN Governor, Sanusi Lamido Sanusi, said the apex bank would guarantee interbank placements and that of Pension Fund Administrators (PFAs) to restore confidence and boost liquidity in the interbank money market.

CBN Governor, Sanusi Lamido Sanusi, said the apex bank would guarantee interbank placements and that of Pension Fund Administrators (PFAs)
CBN Governor, Sanusi Lamido Sanusi, said the apex bank would guarantee interbank placements and that of Pension Fund Administrators (PFAs)

However, cost of funds in the interbank money market since the CBN announcement last week removed the restrictions on interest rate and announced guarantee for interbank loans.
The rates moved from 21 per cent two Mondays ago with interest rates on overnight lending rising to close at 22 per cent on Friday.

Yesterday, it rose to 23.5 per cent. Bank treasurers attributed the rise in rates to the removal of the restrictions on interest rate by the apex bank as well as the conditions attached to the guarantee for interbank placement by the apex bank.

To stem these arbitrary movements, the apex bank yesterday announced conditions for accessing the guarantee.
In a circular to all banks signed by the Director, Banking Supervision Department, Mr. Samuel Oni entitled, “Guarantee for Inter-bank Placement and Placements with banks by Pension Fund Administrators”, the CBN spelt out the conditions for guarantee of interbank loans.

The circular said, “In the effort to resolve the effectiveness of Monetary Policy, the CBN, following the meeting of the Monetary Policy committee on July 07, 2009, resolved to guarantee all inter-bank placements and placements with banks by Pension Funds Administrators maturing on or before March 31, 2010. In order to give effect to the decision to guarantee inter-bank placements, banks are advised to be guided as follows:-

•The pricing of the placements must reflect the credit enhancement provided by the guarantee. Thus, it is expected that overnight placements shall not be priced higher than MPR + 2%, while a maximum spread of 300, 400 and 500 basis points above the MPR shall be maintained for tenors up to 30, 60 and 90 days, respectively. Any placements priced outside these bands shall not be eligible under this programme.

•The guarantee shall be applicable to only inter-bank transactions by Nigerian banks that are denominated in the local currency, that is, the Naira.

•All transactions by banks in this regard shall be subject to the single obligor limits of the participating institutions. In other words, for the guarantee to be effective, the placement(s) by an institution to another institution shall not exceed its single obligor limit at any point in time.

•Placements by Pension Funds Administrators shall continue to be subject to the exposure limits set by the National Pension Commission (PENCOM), if any. To qualify under this arrangement, pricing most also be in line with (i) above.

•The guarantee on all inter-bank placements that meet the above requirements shall be applicable to only those maturing not later than March 31, 2010, and it covers full payment of principal and accrued interest in the event of a default.

Furthermore, in order to avoid arbitrage in the money market, banks are reminded that access to the CBN Discount Window for the purpose of placement at the inter-bank market, is not permitted. Such action shall be regarded as unprofessional conduct and would attract very severe sanctions.

Banks are reminded that the ultimate objective of these measures is to bring down lending rates and stimulate economic growth. They are therefore urged to pass on the benefits of reduced funding costs to their borrowing customers.

The CBN will continue to monitor rate movements on a regular basis. This circular takes effect from July 13, 2009.”

A bank treasurer however said the conditions have made the guarantee unattractive to banks.

He said that because of the removal of restrictions to banks’ deposit and lending rates customers are now demanding for 20 per cent on deposits.

If customers are demanding 20 per cent, no bank would want to do overnight lending of 11 per cent in the interbank, as required by the conditions attached to the guarantee. The interest rate cap in the conditions for the guarantee does not reflect the realities of the market, he said.

Announces more requirements on financial statements

In another circular to banks, the CBN announced additional requirements to be met by banks in the preparation and submission of their accounts as at June 30th.

The circular also signed by Oni entitled, “Re: Preparation of financial statements as at June 30, 2009”, said, “Further to our circular ref: BSD/6/2009 of June 19, 2009 requiringbanks to prepare their financial statements as at June 30, 2009, banks are required to take note of the following additional requirements;

Total loan loss provisions should show the following breakdown:
•Provisions (including other known losses) as at the last audited accounts.
•Loan loss provisions for subsequent quarters up to June 30, 2009.

•The aggregate loan loss provisions as at June 30, 2009.
While the submission deadline of July 15, 2009 remains unchanged, banks that have already complied with the circular are required to provide the additional requirements stated above.

Meanwhile, the CBN Governor, Mallam Sanusi Lamido said that the apex bank would review the Banks and Other Financial Institutions Act (BOFIA) as part of measures to strengthen its regulatory capacity.

On measures taken by the apex bank in reaction to impact of the global financial crisis on the banking sector, He said, “The has adopted the International Financial Reporting Standards and would review the Banks and Other Financial Institutions Act (BOFIA) to strengthen its regulatory capacity.


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