CBN Prohibits Trading, Loan Refinancing in New Credit Scheme

• Limits maximum facility to N10bn
• Repayments to be remitted quarterly

Obinna Chima and Nume Ekeghe

The Central Bank of Nigeria (CBN) Thursday prohibited operators involved in trading activities from accessing its real sector support facility and warned banks that attempt to “falsify through presentation of projects that do not meet the eligibility criteria/specified terms and conditions shall attract severe penalties”.

Also, it stressed that refinancing of existing loans is prohibited for funding under the programme, saying that any attempt to falsify information would also attract severe sanctions.

These formed part of the guidelines for accessing the Real Sector Support Facility (RSSF) through Cash Reserve Requirements (CRR) and Corporate Bonds (CBs) released Thursday, a copy of which was obtained by THISDAY.

The activities to be covered under the programme would be Greenfield (new) and expansion (Brownfield) projects in manufacturing, agriculture and other related sectors approved by the CBN.
It, however, pointed out that emphasis would be placed on Greenfield projects.

The facility shall have minimum tenor of seven years and two years moratorium. Also, participating financial institution (PFI) shall bear the credit risk.

At its July 2018 Monetary Policy Committee (MPC), the CBN had emphasised the need to increase the flow of credit to the real sector of the economy in order to consolidate and sustain economic recovery.

To achieve this objective, the central bank had also stated that banks would henceforth be incentivised to direct affordable, long-term bank credit to the manufacturing, agriculture, as well as other sectors considered as employment and growth stimulating.

Also, it had stated that Corporates/Triple A-rated companies would be encouraged to issue long-term corporate bonds (CBs).

But under the new guidelines, the CBN pointed out that banks interested in providing credit financing to Greenfield (new) and Brownfield (new/expansion) projects in the real sector (agriculture and manufacturing) may request the release of funds from their CRR to finance the projects, subject to the bank providing verifiable evidence that the funds shall be directed at the projects approved by the CBN.

It stated: “This programme involves investment by the CBN and the general public in CBs issued by Corporate subject to the intensified transparency requirements for Triple A-rated entities.

“Such requirements would include publishing through printing of an Information Memorandum spelling out the details of the projects for which the funds are required together with terms and conditions showing that these are long term projects that are employment and growth stimulating.”

The new guidelines stressed that priority would be accorded projects with high local content, import substitution, foreign exchange earnings and potential for job creation.

According to the CBN, the objectives of the facility includes to improve access to affordable finance to the manufacturing, agricultural, and other related sectors that are employment and growth stimulating to the economy.
In addition, it is aimed at stimulating growth in employment-elastic sectors.

Providing insights into the differentiated CRR (DCRR) system, the guidelines stated: “It shall comprise loans to Greenfield or expansion projects using CRR. Emphasis shall, however, be on new projects.”

In terms of CBs, which are financing instruments issued by corporates that meet eligibility criteria as specified by the CBN, the tenor shall be as specified in the prospectus by the issuing corporate but not below seven years. Also, the moratorium for such CBs shall be as specified in the prospectus by the issuing corporate.

It specified: “The maximum facility shall be N10 billion per project. Facilities are to be administered at an all-in interest rate/charge of 9 per cent per annum. Bank customers are encouraged to report any bank to the CBN’s Director of Banking Supervision, where such DMB may have charged interest rates above the prescribed maximum of nine percent per annum.

“Repayments shall be amortised and remitted on quarterly basis to the CBN.
“Only CRR contributing DMBs shall be eligible to participate under the DCRR. For CBs, all financial institutions and general public are eligible to participate in investing in CBs.

“A borrower shall be an entity incorporated in Nigeria under the Companies and Allied Matters Act of 1990. Such borrower must not have a non-performing facility with any financial institution.”

Under the programme, the PFIs are expected to undertake due diligence based on normal business consideration; forward an initial credit request on the proposed project to the CBN for pre-funding assessment/ approval-in- principle to proceed; forward final approved requests to CBN for funding after meeting all conditions precedent to disbursement of the facility; and disburse funds to obligors through their banks in agreed tranches, based on disbursement schedules submitted by the banks to the CBN within five working days of release from the CBN.
The PFIs are also expected to render periodic returns as specified by the CBN from time to time, monitor the projects and comply with the guidelines of the facility, among others.

CBN: How It Will Work

Throwing more light on the new guidelines, the Acting Director, Corporate Communication, CBN, Mr. Isaac Okorafor, who spoke on Arise TV, a sister broadcast arm of THISDAY Newspapers, said: “We understand this economy and increasingly we are getting to understand some of the tricks, and of course you have seen the success we have recorded in the foreign exchange market because of the greater and deeper understanding of some of the tricks that the dealers, including banks play.

“Now on this one, we know that this economy is large and we have a large population with high consumption. We know that with time, there are opportunities everywhere even including funding for infrastructure. And so, we have set up the guidelines and we have set up the machinery for the monitoring and we believe it would work.”

He said the central bank would effectively police the policy and ensure its success through strict monitoring.
According to him, “We already have a system of monitoring projects in addition to what the governor is setting up, which is an economic intelligence unit that reports directly to him. Of course there are risks everywhere but for projects that are in manufacturing, the risks are not so much, but they are there and of course the normal process of risk management would be employed.”

In terms of the level of capital outflows recorded by the country in recent time, Okorafor said compared with other emerging economies, Nigeria had not performed badly.

He said: “We heard yesterday Angola is going for an IMF programme, Sierra Leone has suffered
depreciation and South Africa is not finding it easy. Indeed, the rate of outflow of investors from this economy is far less than what ordinarily would have happened, which shows that there is huge confidence in the Nigerian economy.
“Otherwise, we wouldn’t still have our foreign reserves at about $47 billion. We have suffered a lot of drain but investors believe that this economy is strong, resilient and offers the best opportunity.”

He added: “At times like this, with the economic growth in the US and the expectations about the political situation in the country as we are going into the elections, of course that is normal. But what I am saying is that if you look at the outflow, it is very commendable at this stage that we still sustain this level.”