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ERGP success tied to robust banking industry—IMF

Whereas the Central Bank of Nigeria (CBN) has repeatedly claimed that Nigerian commercial banks are all strong and fit, the International Monetary Fund (IMF), has warned that many commercial banks need to raise new capital and boost their capital adequacy ratios.

In an interview, the IMF’s Mission Chief for Nigeria, African Department, Mr. Amine Mati, argued that fresh cash injection has become inevitable to drive the desired growth in the economy.

The last recapitalization exercise was done in 2005, when the banking industry was segregated into three tiers from international banks, to national and regional banks with different capital base.

The CBN pegged the minimum capital base from N2 billion to N25 billion. A key import of the exercise is the reduction of the number of banks in Nigeria from 89 to 25 after mergers and acquisitions.

Currently, there are 21 commercial banks, four merchant banks and one non-interest bank.

The IMF chief averred that fresh recapitalisation 12 years after, will avail the banks to secure fresh funds to boost the Federal Government’s chances of achieving the Economic Recovery and Growth Plan (ERGP) target. The ERGP, a Medium Term Plan for 2017 to 2020, is designed to help the Federal Government jumpstart the economy.

While the capital adequacy ratio of most banks is generally above the minimum regulatory threshold of 15 per cent, the adoption of Basel II implies additional capital as banks grow their risk assets.

Ordinarily, banks that are designated as systemically important banks (SIBs) are expected to provide for additional 100 basis points to increase their minimum capital adequacy ratio to 16 per cent as against the general requirement of 15 per cent. National and regional banks need only 10 per cent capital adequacy ratio.

Many banks are already accessing the Eurobond market for tier-2 capital. Market sources said more lenders may return to the capital market for additional funds in the months ahead to create a head room for loan growth.

Apart from rejigging the banks’ capital base, Mati also advised the Federal Government to embark on full Value Added Tax (VAT) reform and cancel tax holidays and exemptions that erode the Company Income Tax (CIT) base. He also urged the government to increase taxes on alcohol and tobacco and broaden VAT by revisiting exemptions.

The Central Bank of Nigeria (CBN) had continued to advise banks to double provisions on performing loans to two percent to build adequate buffers against unexpected losses, as liquidity ratios fall. Besides, lower revenues for government and oil companies due to plunging crude prices have led to unsecured exposures for banks that are likely to increase credit risk and loan losses. The level of non-performing loans has risen to nearly 15 per cent against five per cent regulatory threshold and lenders need new capital to maintain sound capital adequacy ratio.