The Central Bank of Nigeria (CBN) has directed Deposit Money Banks (DMBs) to stop utilising gains from their foreign exchange revaluation for dividends and operational expenditures.
The new directive is contained in a letter signed by the CBN Director, Banking Division Department, Haruna Mustafa, on Monday.
FX revaluation gains refer to the increase in the value of a bank’s assets and liabilities denominated in foreign currency when there is a change in the exchange rate between the foreign currency and the local currency.
The CBN said it had assessed the consequences of the recent FX rate regime change on the banking system and identified its potential to substantially impact the Naira values of banks’ foreign currency (FCY) assets and liabilities.
It added that to mitigate this risk, it has directed DMBs to set aside their FCY revaluation gains as a counter-cyclical buffer. This means that the banks cannot use these gains to pay dividends or meet operating expenses.
“Treatment of FX Revaluation Gains: Banks are required to exercise utmost prudence and set aside the FCY revaluation gains as a counter-cyclical buffer to cushion any future adverse movements in the FX rate. In this regard, banks shall not utilise such FX revaluation gains to pay dividends or meet operating expenses,” CBN said.
CBN has also stated that it will grant forbearance to DMBs that inadvertently breach the Single Obligor Limit (SOL) or Net Open Position (NOP) limits due to the FX revaluation.
The SOL is the maximum amount of credit that a bank can extend to a single borrower. The NOP is the maximum amount of foreign currency exposure that a bank can have.
“Single Obligor Limit (SOL): Banks that inadvertently breach the Single Obligor Limit (SOL) due to the FX policy will be granted forbearance upon application to the CBN. The forbearance shall apply only to existing facilities as of the effective date of this policy. Such banks shall be exempt from the regulatory deductions on the excess above the SOL limit in their CAR computation.”
“Net Open Position (NOP) Limit: Banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application.”
The apex bank also noted that the existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits shall continue to apply and shall be exempted from the regulatory deductions on the excess above the SOL limit in their CAR computation.
According to CBN, banks that exceed the NOP prudential limits due to the FX revaluation shall be granted forbearance for the breach upon application and existing prudential regulations on capital adequacy, dividend payments, and FCY borrowing limits shall continue to apply.
