CBN Proposes New Loan Provisioning Regimes

The Central Bank of Nigeria (CBN) has proposed new loan provisioning regimes and a framework for collateral adjustments for lost facilities in a bid to adjust to the current economic realities necessitating lending to the critical sectors of the economy.
The board of the CBN is expected to approve this proposal which will lead to a longer period of loan provisioning when it meets in the middle of this month in Abuja.
Banks - majority of which got their hands burnt through margin loans (loans that allows customers to buy shares on credit) in the stock market and are still making provisions for them - are very excited about this development, which, when effective, may reduce their level of provisioning.
A majority of the banks taken over by the banking watchdog last year played heavily in the stock market and the downstream sector of the oil industry, which was hit by the volatility in the international price of crude oil and the depreciation of the naira exchange rate.
The last time the current Prudential Guidelines, which is now going to be reviewed every five years, was issued was in 1990 and the review is considered long overdue.
The current Prudential Guidelines requires that all loans irrespective of whether they are short or long term are accorded the same loan loss provisioning standards.
Loans that are due but not paid after 90 days attract 25 per cent provisioning, 180 days 50 per cent, and 360 days 100 per cent.
But, according to a draft exposure on “Review of Prudential Guidelines” which classifies the various types of loans banks can give into 11 categories, a special provisioning regime using a time-based approach is in being proposed.
Under the proposed regime, Small and Medium Enterprises (SMEs) and Agric Financing (both short- term) will now attract provisioning of 25 per cent if such facilities fall between 90 days to one year; 50 per cent for one year to one and half years; 75 per cent for one and half years to two years and 100 per cent for facilities above two years.
But banks desirous of lending to SME and Agric Financing for long-term would have to make provisions of 50 per cent for facilities that fall between a year and two years; 75 per cent for two years to three years, and 100 per cent for facilities above three years.
For infrastructure project financing which are long-term projects (like roads, dams, petroleum extraction, power transmission and distribution etc), the CBN said the banks portfolio should not be more than 20 per cent of gross loan book including off balance sheet engagements. It said any excess over 20 per cent limit would be fully provided for.
Banks keen on engaging in project financing are to make provisions of 25 per cent if such facilities fall between two and three years; 50 per cent for three to four years; 75 per cent for four to five years and 100 per cent for facilities above five years.
Banks into object financing (e.g. ships, aircraft, satellites, railcars etc) would have to make provisions of 25 per cent for facilities that fall 180 days and two years; 50 per cent for two to three years; 75 per cent for three to four years and 100 per cent for facilities above four years.
For real estate financing (projects like office buildings to let, retail space, multifamily residential buildings, industrial or warehouse space or hotels), where the prospects for repayment and recovery on exposure depend primarily on the cash flows generated by the asset, banks have to provide 25 per cent if such facilities fall between 180 days and one year; 50 per cent for one to two years; 75 per cent for two to three years and 100 per cent for facilities above three years.
The banking watchdog also proposed collateral adjustments in loan provisioning. The CBN, however, said it can require that banks make additional provisions based on concentrations risks, industry knowledge on obligors and other subjective factors - details of which will be provided in the revised prudential guidelines.