March 31, 2011 by Ayodele Aminu
Any bank or discount house chief who deliberately misreports its financial statements will be removed fom office by the Central Bank of Nigeria (CBN).
Also to lose his or her job is the compliance officer of any institution, whose primary duty is to ensure that the financial reports are factual and in order.
These are some of the highlights of the new supervisory intervention framework for all banks and discount houses, which has just been released.
Besides, the banking watchdog, said a bank with Capital Aadequacy Ratio (CAR) greater than 5%, but less than the prescribed minimum CAR of 10% in a month, would be restricted from paying dividend and investing in other subsidiaries/related companies.
But, if the capital deficiency persists for three months, the apex bank, according to the document dated March 15, 2011, " would conduct special examination and place the institution on CBN/Nigeria Deposit Insurance Corporation watch list.
If a bank, however, has CAR that is equal to or greater than 2% but less than 5%, the CBN, according to the document, entitled "Supervisory Intervention Framework for the Banking Industry in Nigeria", said it would use a combination of the following: restrict lending to recoveries made; request for business plan on how freshfunds are to be injected into the bank; CBN would review the institution’s business plan; and make final capital call on the bank within four months from time of accepatance or otherwise.
Besides, within two months after the final capital call, the CBN, according to the document, which has been sent to banks and discount houses by CBN’s Director of Banking Supervision, Mr Samuel Oni, may take over the managment and control of the bank and hand it over to the NDIC. The CBN may also appoint the NDIC, which may consider recapitalisation and restructuring by new investors; create incentives for healthy banks to take over the sick one; and encourage private debt factoring companies to acquire the bad debts of the bank.
A critically undercapitalised bank with CAR less than 2% but greater than zero, risks being taken over by the CBN immediately and/or injection of funds and demand that shareholders should capitalise within six months or otherwise sell the bank.
For an insolvent bank with negative CAR, if the supervisory action above does not work, the apex bank, according to the document, shall revoke the bank’s licence.
But, if a bank is slightly illiquid (if liquidity ratio of not more than 25% below the minimum prescribed), the CBN would invite its managment for discussion on its plans to improve liquidity and also ask it to submit such a plan for approval.
In the case of a significantly illiquid bank (if a bank records 50% below the minimum prescribed), the apex bank, said the document, shall conduct spot check to investigate the problem of the bank, including complaince with its own contigency plan. It would also invite the board and management for discussion on what they are doing to address the problem.
For a bank whose asset quality is weak (where the proportion of non-performing credits to total credits is more than 10% above the tolerable limit prescribed), a combination of all the following could be used by the CBN: conduction of a special/target examination to determine the factors responsible for the increase in non-performing credits; request for action plan from management to address the problem within three months and request the bank to make additional loan loss provision.
A bank with a critically weak asset quality (where ratio of non-performing credit is more than 10% above the prescribed limit), the banking watchdog, in addition to the actions above, would take any combination or all of the following: recall improperly booked loans; remove or blacklist errant director(s) non-performing insider-credits or ask the bank to divest from the subsidiary/related company where the activities of the subsidiary/related company are immical to the health of the bank.
Furthermore, in an insitition where there is rising frauds and forgeries, any or a combination of the following would be used by the CBN: a formal letter to the bank requesting for reasons for the abnormal increase in fraud cases and measures to address them; CBN/NDIC to conduct a target examination to review the bank’s internal control processes and operating manuals and a query to the chairman of the board and managing director/CEO of the bank.
The framework contains three procedures, including early warning signals of unsound banking practices and opportunity for self-correction or enforcement through supervisory actions; corrective actions and considerations for determining the appropriate superviroy response to capital, liquidity, asset quality and other challenges as well as resolution options for insolvent ot critically unsound banks, including the need to identify such banks promptly and consider approriate action.
The new framework, which is being introduced to replace the contigency framework and complement the revised prudential guidelines issued in July 2010, provides regulators with global benchmarks for safety and soundness of the banking system. It also provides them with general and specific thresholds for regulatory interventions in banks.
The new struture is divided into four parts: general supervisory approach; supervisory intervention in individual bank; risk-based rating and supervisory action, as well as supervisory action in the event of sytemic banking distress.
Under the general supervisory approach, which involves assessing the safety and soundness of regulated finnacial institutions and providing feedback to such institutions, the banking watchdog says it would also conduct on-going/off-site monitoring of the institutions .