CBN: AMCON to Clear N1.5tr Bad Loans by Dec

Written by This Day Friday, 02 July 2010

The Central Bank of Nigeria (CBN) has said the proposed Asset Management Corporation of Nigeria (AMCON) will clear $10 billion (about N1.5trillion) of bad loans from the banking system by the end of this year.

CBN Governor Sanusi Lamido Sanusi made the disclosure yesterday in an interview he granted Bloomberg News in London.

He said the debt purchases would cost the CBN “roughly” $5 billion as commercial banks don’t have collateral to cover the bad loans.

The banking watchdog is waiting for presidential approval for a law on AMCON. The National Assembly had last week approved legislation to create the asset management company, a “bad bank” which will buy up non-performing loans in exchange for government bonds, but the bill needs final presidential approval.

Sanusi said: “The presidential bill is a formality. We expect it to be transmitted to the presidency this week and hopefully we can get a sign-off as early as next week.”

Reuters also quoted him to have said in London that the results of the bid on rescued banks would be released by September or October this year.

He said four international banks were among the likely bidders for Nigerian banks and that he expected the process to be in by the end of July.

“We expect (the bid) by the end of July from local banks, foreign banks and private equity firms. The bulk of them are local. There are four international banks. The results of the bids would be released by September or October,” Sanusi said.

The CBN boss expressed concern at the likelihood of another asset buddle at the nation’s capital market, owing to huge interest of foreign investors to invest in the country.

He said he expected foreign investment in Nigeria to rise as investors bet on rising oil prices, increased Nigerian oil production, and improved regulation of the banking sector.

Sanusi however, cautioned that the development could lead to another asset bubble building up at the local market.

"My concern is we get this tremendous inflow from everyone who thinks markets are going to go back up. There is basically a high risk of money flowing to capital markets. How much of that is recovery and how much is a bubble being formed, that's a concern," he said.

Analysts attributed last year's banking crisis to largely the result of an asset bubble caused by banks lending heavily to stock market traders and oil distributors and then finding themselves dangerously undercapitalised when the markets turned against them.

The Governor pointed out that the apex bank’s top priority has been to restore the health of the rescued banks by taking bad loans off their books and finding new investors to recapitalise them.

On the improved first quarter results released by the banks, the Governor said the profits had three main surces the loan reduction, a cut in overheads including redundancies, and lower inter-bank borrowing rates.

Most of the rescued banks reported a return to profit in the first quarter but some analysts said the figures masked the facts that the banks have not had any underlying growth. The analysts said the figures reflected the booking of recovered loans as profits, after the banks made higher-than-expected provisioning in 2009.

Sanusi said: “They used to take deposits at 15 per cent, now they take them at less than 5 per cent, so it's really a no brainer that they are in profit now," but shareholders' funds of the rescued banks remain negative.”

He also disclosed that the CBN sees no reason to raise the country’s benchmark interest rates, the Monetary Policy Rate (MPR). The Monetary Policy Committee (MPC) meeting is scheduled to hold next Monday.

The MPR has been on hold at 6 per cent since May last year despite double-digit inflation and the strive of the CBN to stimulate growth in the wake of last year's banking crisis and the global meltdown.

Sanusi said: “We see no compelling reason to raise rates.” He described headline inflation of around 11 per cent in May as "relatively stable".

The Governor told Bloomberg: “We have stopped the hemorrhaging. The hole is not getting any deeper and while the CBN consolidates the financial industry there is “no compelling reason to change rates. It would be wise not to disrupt the balance.”

 Sanusi called for total economic transformation of the country saying: “The vulnerability of Nigeria is easily addressed with the right policies. We need to have structural transformation. We have GDP growth that is driven by domestic demand. It’s just a question of improving productivity in our culture, improving critical infrastructure and creating a better business environment.”

The Governor stressed that Nigeria also has room to borrow more on international capital markets to meet development objectives. The Debt Management Office (DMO) announced recently that it would sell the $500 million bond by October this year.

Sanusi said: “Total gross national debt of Nigeria is less than 12 per cent of GDP. In taking long-term foreign debt, as long as we hedge the foreign exchange and interest rate risk, that is probably better than taking more domestic debt at this time.”