CBN suspends directive on oil sector loans

CBN Governor, Mr. Godwin Emefiele

A new rule meant to assist banks to manage their loan risks in the oil and gas sector in the face of the falling oil prices has been suspended by the Central Bank of Nigeria.

The suspension came barely one month after the CBN introduced the rule entitled ‘Oil and gas industry credit risk mitigation’

It was meant to assist banks to minimise and manage their loan exposures to the oil and gas sector following the falling crude oil prices.

In a circular dated January 7, a copy of which was obtained by our correspondent on Sunday, the central bank said it had suspended the rule in order to complete the ongoing implementation of the Basel II/III capital adequacy ratio framework.

The Basel II/III capital adequacy framework, another regulation introduced by the CBN earlier, is expected to assist banks to raise additional Tier 1 capital to strengthen their operations.

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The new CBN circular, which was signed by the Director, Banking Supervision, Mr. K.O Balogun, however, read, “Please refer to our letter entitled ‘Oil and gas industry credit risk mitigation’ and dated December 10, 2014.

“In view of the ongoing implementation of the Basel II/III capital adequacy framework, the application of this regulation has been deferred till further notice. A new date would be advised to all banks in due course.

“However, the banks are required to put in place adequate risk mitigating techniques or the management of their oil and gas risk exposures which would be reviewed during our regular risk-based supervision activities.”

The CBN had, on December 10, written to the deposit money banks asking them to ensure that they have sufficient capital buffers to mitigate the escalating risk-taking activities in the oil and gas sector following the falling oil prices.

The letter was signed by the Director, Banking Supervision, Mrs. Tokunbo Martins.

The letter stated that where the exposure to the oil and gas sector was in excess of 20 per cent of the total credit facilities of a bank, the risk weight of the entire portfolio in such facilities would attract a risk weight of 125 per cent for the purpose of capital adequacy computation.

The letter also directed banks to prepare and forward to the central bank the computations and results of their single-factor sensitivity stress test as of December 8, 2014.

The single-factor sensitivity testing is a form of stress test that usually involves an incremental change in a risk factor, holding other factors constant.

According to the letter, the price points to be used by the banks for the test are $50 per barrel, $55 per barrel, $60 per barrel and $65 per barrel.