CBN and challenges of bank regulation
The Central Bank OF Nigeria (CBN) regulatory policies on deposit money banks usually set the tone for a stable financial system. However, like all human organizations, attributes of perfection can hardly be ascribed to her banking policies over the years. This is because making monetary and other policies workable for example, is predicated on the classical Economics principle of “ceteris paribus” (all things being equal). We all know that this concept of all things being equal is not even supported by nature where all fingers are not equal. At the end of the day, the success or failure of CBN regulatory policy is a matter of trial and error. This write-up will focus mainly on CBN regulatory policies with regard to bank loans and loan recovery against the background that management of loans has become problematic in the banking industry because of frequent default by loan beneficiaries which led to chronic bad debts that is threatening insolvency in the banking industry. Lack of liquidity, or adequate liquidity in the banking system caused by inability to recover loan is a desperate situation which the CBN responded to by taking desperate action through getting herself indirectly involved in the loan recovery process which, strictly speaking, is not one of the traditional functions of Central Bank.
First, the CBN in a bid to force loan defaulters to pay introduced the strategy of” name and shame” them In utter disregard for well known banking law and practice enshrined in TOURNIER V NATIONAL PROVINCIAL BANK AND UNION BANK OF ENGLAND ( 1924) I KB 461 that affirms a strong bond of secrecy between a bank and her customer, the CBN directed banks to publish the names and addresses of chronic loan defaulters in widely circulating newspapers , just to name and shame them with the expectation that they will be forced to pay. The CBN goofed with this policy because banker/customer relationship is a contract in which banks are liable to be sued by an aggrieved customer if information about their affairs with the bank is disclosed to third parties without their consent. There are exceptions to this general rule but what CBN did was not one of them. It was therefore not a surprise that the policy of ‘name and shame’ was abandoned when banks began to be sued to court by aggrieved customers. At the end of the day, the beneficiaries of CBN’S goof were not banks but newspaper houses that smiled to the bank with fat advertising revenues and Lawyers that were instructed to file the case in court and claim damages. We may also contend that name and shame policy drew the anger of bank customers and even hardened their resolve not to pay after public ridicule. For the banks, it was more like cutting their nose to spite their face the questions some of us professional bankers were asking are: Where is the place of security for bank loan in all these? Against this background of difficulty in recovering loans, why is the CBN now asking banks to lend 65% of their deposit base to customers by executive fiat in a stationary economy? Will the target beneficiaries be able to provide adequate security as well as meet the lending criteria set by banks in their credit policy? Each bank has its risk appetite and for CBN to set the minimum volume of credit banks will release into a non performing economy leaves much to be desired. For the avoidance of doubt, section 18(1)(b) of Banks And Other Financial Institutions Act 1991 as amended provides “No manager or other officer of the bank shall grant any loan or credit facility to any person unless it is in accordance with the rules and regulations of the bank and where adequate security is required by such rules and regulations such security shall prior to the grant be obtained and deposited with the bank”..Penalty for non-compliance to this provision of the law is also stipulated.
The point we are making is: if the CBN authorized naming and shaming of delinquent bank debtors, they should treat the officers that approved the loan with equal measure for balance. Second, in a bid to assist banks in the process of loan recovery in case of default, and that raises regulatory hope, the CBN has directed banks to insert a clause in the loan offer letter going forward which authorizes the bank to attach the credit account balance of the loan beneficiary in any other bank in Nigeria in the process of loan recovery. When implemented, there will be no need instituting a loan recovery case in court to obtain a “garnishee order” on the customer’s credit account balance in another bank which takes a lot of time. That is a smart move but it seems an initio the CBN is to blame for supervisory negligence in the bad loan crisis. How? You may ask.
Banks created the mounting loan crises by their operational modalities which the CBN field supervisors and even Nigeria Deposit Insurance Corporation (NDIC) should have discovered and prevented but they failed to do so. In an earlier write up by this writer in Guardian titled: WHEN A REGULATOR AIDS AND ABETS ILLEGALITIES, the point was made that the CBN in their Guidelines to bank charges approved some charges which violates banking principles and practice and so are illegal. What created the loan crises is the stipulation in the CBN Guide To Charges by Banks and Other Financial Institutions In Nigeria 2017 which empowers banks to pay interest on deposits based on simple interest per annum measured by minimum 30% of Monetary Policy Rate (MPR) on one hand while interest payable on loans is priced as negotiable( the rate should anchor MPR reflecting the risk based pricing model} on the other.
Consequently assets (loans) and liabilities (deposits) are priced on different basis in the same portfolio which is a gross violation of the principles of assets and liabilities management. Banking supervision should ensure that banking policies do not violate established banking principle, practice and equity in business transactions. Why should banks be calculating interest on deposits based on per annum simple interest while using risk adjusted rate of return or compounding method which gives a higher value in calculating interest on loans? Where is the place of equity in all these? That is the reason why excess charges occur and the CBN is happy helping bank customers to recover it instead of pro-actively nipping the problem in the bud by ensuring equitable pricing of assets and liabilities in the tariff document. Interest rate compounding is the reason why the probability that loan beneficiaries will default or become unable to pay mid way through the life span of the loan is very high. Indeed the way banks in Nigeria structure loan repayment without moratorium in most cases coupled with fees and high interest rate vis a vis deposit rate is the reason why a loan beneficiary that will not make up to 100% profit on the loan cannot repay. As a regulator it is the statutory duty of the CBN to compel banks to price assets and liabilities on the same basis of simple interest which was the practice of this same CBN in banking era before 1986 when the banking industry was deregulated.
Deregulation is not a license for bank or the CBN to re-invent the wheel. Until the CBN wakes up to do the right thing by reversing itself in the tariff document to align with pre 1986 practice that ensured crisis free loan market, they will be dealing with a problem with no solution. This writer strongly believes that the CBN should not as a matter of policy compel banks to lend 65% of their deposits in a non performing economy by executive fiat in a deregulated banking era where demand and supply forces drive the loan market. That is why many industry watchers are of the opinion that the CBN has not been professional enough in generally formulating banking policies in this democratic era. In that connection it is arguable whether CBN has allowed itself to become a willing tool in the hands of politicians to make banking policies that will enable them (politicians) fulfill their campaign promises to the electorate in the course of managing the economy. In granting loans, banks do industry risk analysis. They prefer to lend to the sector with the least risk even if it offers the lowest return on investment. There is a chance that this 65% lending to deposit ratio policy will make banks to lend to their peril just to comply with the directives of the regulatory authorities to avoid sanction and in the process worsen the existing bad loan debacle. Certainly, that is not the best way to revive an ailing economy.
Enyinnaya, fellow, Chartered Institute Of Bankers, wrote from Ikeja , Lagos.
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