What may have started as an honest attempt to save the Nigerian banking industry is gradually degenerating into a major economic crisis. The Central Bank of Nigeria’s (CBN) daring move which saw the sudden sack of five bank Managing Directors have left the Nigerian economy with serious collateral damage that will task the economic management skills of the apex bank.
From all indications the CBN attempt to isolate and safe the five banks by pumping in N420 billion ($2.6 billion) and a installing a new management may not really end up saving the banks. It will just keep them alive to absorb more money from the apex bank which has already gone ahead to guarantee a permanent lifeline to the five banks domestic and international depositors and creditors.
The CBN guarantee was the minimum it needed to safe the banks from a experiencing a domestic run on their operations. With the CBN openly admitting that the five banks were in trouble, it was the signal that depositors needed to get out their funds from the banks. The aftermath of the CBN action has seen a consistent withdrawal of funds from the vaults of the five banks with little or no deposits occurring. No bank will survive a continuous outflow of cash from its vaults.
Internationally, the five banks especially and other Nigerian banks have suddenly had their international credit lines cancelled. One of the five banks is said to have had an international credit line of $1.5 billion cancelled in the wake of the CBN action. Nigerian banks may have lost international credit lines in excess of $10 billion following the CBN action. Hence the rush of the CBN governor to London, the world’s financial capital to explain his actions in the Nigerian banking industry.
The situation of the five banks have been compounded by the fact that the anticipated fast paced recovery of the nonperforming loans on their balance sheets has not materialized even with the intervention and harassment of debtors by the Economic and Financial Crimes Commission. As at the last count by the EFCC total loan recovery for all the five banks stood at about N70 billion from a total nonperforming loans of N747 billion as alleged by the CBN.
A clearer picture of the desperate situation faced by these banks becomes obvious when it is realized that deposit mobilization in these banks have come to almost a standstill, lending is at a total standstill as the newly installed management struggle to retool the operations of the five banks. However, even with no fresh money coming in, the banks are still forced to maintain their operations, paying staff salaries and other overheard costs incidental to their existence.
Faced with this situation the CBN will be forced to keep its cash tap open for these banks to stay alive. Already, there are strong speculations that the CBN bailout for the five banks will increase to a trillion naira ($6.67 billion). But this was before the House of Representative intervened and questioned the right of the CBN governor to lend money to the banks without its approval. Until this controversy is resolved, the CBN may be reluctant to give fresh money to the five banks.
This may raise critical issues for the survival of the five banks. Would they resort to the interbank market to stay alive? With the guarantee from the CBN, they are likely to be able to borrow from the interbank market. However, this will effectively return the five banks to the state they were in before they were taken over by the CBN, net borrowers of funds from the interbank market.
The new management of these five banks may have started seeing the desperate position they are currently in and have positioned for massive loan recovery. How successfully they do this will determine their liquidity but considering the current state of the economy, and the conservative disposition of the banks yet to be directed affected by the CBN action, success will be relatively minimal.
(more…)
