Wednesday, December 17, 2014 12.29PM / Sriram Sekhar /Proshare India
The Central Bank of Nigeria (CBN) has mandated all banks to adopt elements of Basel II and III relating to market and operational risk when computing capital adequacy ratios (CAR).
International standards set by the Basel Committee demand that banks meet minimum capital requirements, measured as a percentage of their assets. The amount of capital that must be held is linked to the riskiness of the assets.
The minimum capital requirements for lenders with operations outside the country were kept at 15 percent and at 10 percent for those with interests only in Nigeria. Unlike the central banks of many countries, the CBN has decided to adopt facets of the Basel II norms, keeping in mind the requirements of the Nigerian markets. Some of the differences are outlined below:
Risks & Weights for Capital Adequacy
Further, the CBN had banned all banks which did not meet the capital requirements from declaring dividends, but later stated that over 80% of the banks have met the capital requirements as of end-November 2014. The CBN also removed some assets which lenders can count as capital, while limiting Tier 2 capital to 33 percent of Tier I capital. This has resulted in several banks having limitations in terms of capital adequacy and this combined with the CBN’s reduction in permissible foreign borrowings, is expected to result in a flurry of equity issues in the NSE. It is estimated that the bank’s will have to raise a combined N40 Bn to meet the new CAR norms.
The banks which have not implemented the new rules, are likely to issue more share either directly to investors through private placements, or through public issues - in which case, the already weak stock market will become weaker still with a flurry of new issues. Bank stocks account for 27% of total equity market capitalization and a 5 percent depression in banking equities will drag the market down by 1.5%.
Apart from the capital requirement, the banks also have to beef up in terms of human resources and infrastructure, with more quantity of data to be stored under the new norms. For instance, the Accord requires banks to store a comprehensive database of operational loss incidents, credit losses, financial instructions, and general ledger data. This will lead to substantial costs for the banks (as well as the CBN) to complete the implementation.
Given the already weak macro economic scenario, on the back of a weak Naira and a weaker oil price, it is unlikely that the banks will be able to pay for such upgrades in the near term. We believe that the deadline is likely to be extended further on the back of the overall macro economic scenario. However, this is a necessary step to further strengthen the banking system in Nigeria, and the long term benefits far outweigh the short term costs.