The World Bank has warned that the assets of Nigerian commercial banks may deteriorate if the Central Bank of Nigeria continues to support undercapitalised banks.

The World Bank gave the warning in its latest Nigeria Economic Update.

In the comprehensive report, which was obtained by our correspondent, the World Bank advised the CBN to monitor the quality of the assets of Nigerian banks ‘closely’.

The World Bank specifically expressed reservations about the manner in which the CBN extended liquidity support to four undercapitalised banks.

“The CBN gave liquidity support to four medium-sized banks that were severely undercapitalised, without requiring hard time-bound recapitalisation plans.

“Going forward, asset quality needs to be closely monitored because it may deteriorate if the CBN continues to exercise regulatory forbearance for undercapitalised banks.

“Banks are performing better, but asset quality needs to be monitored closely,” the World Bank said.

The bank observed that non-performing loans, mostly in the oil, gas, and power sectors, declined from 12.4 per cent in June 2018 to 9.4 per cent in June 2019.

However, it noted that the decline was driven by write-offs and clearance of oil-sector-related arrears that improved the cash flow of bank borrowers so they could repay banks and sale to asset management companies.

The World Bank also expressed reservations about measures introduced by the CBN to encourage banks’ lending to the private sector, which had been negative since 2017 but rose to -0.2 per cent in June 2019, year-on-year.

The CBN had via a circular issued on July 3 instructed banks to ensure a minimum loan-to-deposit ratio of 60 per cent by September 30, 2019.

Adherence to the LDR was to be reviewed quarterly, and failure to meet the requirements would result in the imposition of additional cash reserve requirements on the shortfall.

The World Bank warned that the measures could have negative impact on the economy.

It said, “It is possible that policy and regulatory efforts to stimulate commercial bank lending to selected private credit segments, while well-intentioned, could entail unintended negative consequences.

“For example, the minimum LDR requirement could lead banks to approve loans that expose them to more risky credits, undermining the quality of their loan portfolios.”

It further warned that the development could lead banks to shift funding modalities away from mobilising deposits, which would undermine financial inclusion initiatives.

“Dropping the level of deposits for which the CBN would remunerate banks when using the Standing Deposit Facility could undermine its ability to control liquidity conditions in the banking system, and additional, potentially costlier open market operations would be required to drain liquidity,” the World Bank added.

Previous measures to boost commercial bank credit to the private sector recorded limited success, the bank observed.

In the same vein, the Bretton Woods institution said the CBN’s subsidised financing to firms in agriculture and manufacturing, especially micro, small, and medium-scale enterprises, could have adverse consequences.

“The CBN interventions could undermine the effectiveness of the credit transmission channel of monetary policy and the signalling role of changes in the Monetary Policy Rate.

“The interventions could crowd out private-sector funding by discouraging banks from venturing into under-served markets without subsidies when the schemes are not properly targeted, as well as creating expectations for borrowing at single-digit rates.”

The World Bank said the interventions could lead to conflict of interest for the CBN between its oversight role in the banking sector, its objectives as an operator of development financing schemes and its interests as a shareholder in development finance institutions.

It added that the development could equally reduce the CBN’s operational surpluses, a share of which was normally transferred to the Federal Government as part of its independent revenue.

Subsidised funding for the MSMES could also undermine transparency and accountability in the allocation of public resources by circumventing the government’s standard budgetary process, the bank said.

Although it observed that exchange-rate convergence was improving, the World Bank noted that there were still several foreign-exchange windows.

While the IEFX window accounts for at least 50 per cent of Nigeria’s total forex transactions, the interbank-retail and the interbank-wholesale market windows were still open, though the exchange rates in these windows had been relatively stable in the N335–N365/$ range.

The bureau-de-change window also exists for retail transactions.

The CBN also has a window for selected imports such as refined petroleum products with a rate of N305–307/$.

According to the World Bank, international experience suggests that multiple exchange rates create implicit public subsidies that can distort the allocation of resources in the economy.