Ayodele Aminu And Moses Obajemu
6 October 2008
Lagos — In a bid to stem the meltdown in the capital market, the Central Bank of Nigeria (CBN) has granted reprieve to banks with large portfolio of margin facilities by approving their request to restructure such facilities for a longer period.
Margin loans are facilities extended to investors by banks for the purpose of share purchase to buoy up individual and institutional investment portfolio.
Some of these facilities have, however, fallen due for repayment but are still outstanding because of the current low share price regime in the stock market, which makes repayment difficult, if not impossible.
However, the Prudential Guidelines for banks stipulate that facilities that are three months old but not performing should be classified as "doubtful".
If after six months, they are still not performing, they are deemed to be "non-performing" and said to be "bad" after six months when the banks are expected to start making provision for them.
In a circular dated October 2, 2008 entitled "Rescheduling of Special Debts", signed by the CBN Director of Banking Supervision, Mr. Ignatius Imala, the apex bank said it was allowing the banks to restructure such margin facilities for a longer period between now and December 31, 2009.
"It should be noted that the forbearance is specifically for only loans made for the purchase of shares in the Nigerian Stock Exchange," the CBN warned.
The apex bank said several banks had recently indicated their desire to reschedule some of their capital market-related exposures, noting that their desire was informed by the strict consideration of Section 2.3 of the Prudential Guidelines, which provides the grounds for reclassifying non-performing facilities.
"Given that the facilities should have been structured for a much longer period from the beginning, the CBN is, by this circular allowing such facilities to be restructured for a longer period between now and December 31, 2009," the apex bank said.
It is estimated that the banks may have granted as much as N336 billion margin facilities to investors, prompting insinuations that the banks may have lost substantial money to the stock market crash.
However, chief executives of banks denied the alleged loss of about N336 billion to the correction in the stock market.
At a recent meeting in Lagos, they picked holes in media reports, which suggest that banks may have incurred monumental losses from share purchase loans to investors.
"The reports are erroneous and a gross misrepresentation of facts probably out of ignorance," they said in a statement signed by the Chartered Institute of Bankers of Nigeria (CIBN) President, Mr. Erastus Akingbola.
"The margin on share purchase loans created by banks ranged between 50-100 per cent against about 35 per cent gross declines in the stock market.
"This means that rather than outright loss the banks still have profit margins on the loans in the range of 15 to 75 per cent. The loans are fully secured in many cases up to 150 per cent cover. The banks are fully aware of the risk in stock trading and that was why the high margins and heavy protection," the bank chief added.
The stock market, which witnessed recorded growth in the first two months of the 2008, began its descent early March and has so far lost some 23 per cent or N2.9 trillion its market capitalisation.
The market capitalisation, which stood at N12.6 trillion in the early period of March, closed last Friday at N9.7 trillion.
However, the first week of the intervention restored some value as the market capitalisation rose from a low of N8.808 trillion to N10.28 trillion. But the bears have since returned and appear ready to stay.
In a bid to stop the persistent slide in the prices of stocks, the Federal Government had invited the management of the NSE and other stakeholders for a meeting in Abuja a couple of weeks ago.
At the meeting, a number of measures were adopted by stakeholders to stop the tide of sliding fortunes of stocks in the country.
The meeting resolved that the office of the Attorney-General of the Federation should issue an exemption to the provisions of the relevant sections of CAMA, to permit quoted companies to buy back up to 20 per cent of their shares to curb the spate of bearish trading in the market.
The CBN was also directed to take appropriate measures to ensure adequate liquidity within the system to oil operations in the capital market.
The meeting also resolved that a Capital Market Stabilisation Fund be established, as an intervention instrument to stem the meltdown in the market.
Also, the commercial banks were advised to restructure existing facilities to aid operations of licensed stockbrokers, institutional and individual investors on longer repayment terms.
Both the Securities and Exchange Commission (SEC) and the NSE, and all capital market operators also agreed jointly to reduce the burden on investors by cutting fees significantly. It was also directed to review its trading rules and regulations.
The NSE has since cut its fees by 50 per cent and taken the following steps: One per cent maximum downward limit on daily price movement would be allowed, while the current five per cent limit on upward movement is retained.
The banking watchdog has also injected liquidity into the economy through intervention by rolling out a number of measures, which has increased the liquidity by over N1 trillion. The measures include, a reduction in the bank's benchmark interest rate by 50 basis point from 10.25 per cent to 9.75 per cent; a reduction in the Minimum Liquidity Ratio (MLR) from 40 per cent to 30 per cent; and the Cash Reserve Ratio (CRR) from 4 per cent to 2 per cent, and they are aimed at reflating the economy by N1.05 trillion.
Additionally, the CBN has also allowed banks to buy back their securities and extended the lending window to 365 days (one year), as opposed to overnight lending.
In an interview with THIS DAY, Soludo said the strategic intervention was necessary because from symptoms of liquidity crunch that were already visible in the economy.
He said the apex bank did not have to wait for financial institutions to start collapsing before administering liquidity support.
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