By Omoh Gabriel
The International Monetary Fund IMF, last week advised the Central Bank as well as the federal government to consider winding down the operation of Asset Management Company of Nigeria. The advice is based on Article IV of the IMF’s agreement with members of the FUND. The Articles of Agreement states that the IMF holds bilateral discussions with members, usually every year. This involves a team of IMF staff visits to the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies.
On return to IMF headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. It was after due consultation with the Nigeria authorities that it released the report in which it considered the current tight monetary stance of the Central Bank of Nigeria to be consistent with the authorities’ objective of reducing inflation to single digits. IMF Board also took note of the staff’s assessment that the exchange rate in real effective terms is broadly realistic.
Directors commended the Nigerian authorities’ success in restoring financial stability after the 2009 banking crisis. In light of this achievement, they recommended winding down the operations of the Asset Management Company to curb moral hazard and fiscal risks. The call for winding down of the operations of AMCON is based on the fact that the CBN has succeeded largely in restoring stability in the Nigerian financial system which was hit by crisis in 2009 as a result of huge non performing loans which threatened the existence of many banks and saw the CBN intervening in five of the banks with N620 billion as bailout package. To ensure that none of the existing banks failed, the CBN in collaboration with the ministry of Finance set up the Asset Management Company of Nigeria AMCON.
The call is also to curb moral hazards and fiscal risk that would arise if AMCON continues in business of buying off non performing loans from banks. Already operators are raising issues with the Company’s purchase of some performing loans.
According Chike Obi the Managing Director of AMCON, Asset Management Company of Nigeria was set up to achieve three-fold function, reducing the level of Non Performing Loans on the books of eligible banks; assisting in the recapitalisation of banks deemed to be in grave danger and managing all acquired assets in a manner consistent both with minimum resolution cost.
The Asset Management Company of Nigeria (AMCON) has acquired 95 per cent of the Non-Performing Loans (NPLs) in the banking sector. Addressing newsmen in Lagos, the Managing Director, AMCON, Mustafa Chike-Obi, stated that at the end of October 2011, AMCON would have successfully acquired N2.78 trillion face value of bad loans from 21 banks at a cost of N1.16 trillion, adding that it had also injected N1.36 trillion into the remaining five banks, which failed the stress test carried out by the industry regulators in 2009, to bring them to a position of zero capital. Chike-Obi stated that the corporation is now moving to the third stage of managing all acquired assets, including NPLs, equity and real assets.
This is where the IMF advice came in. AMCON has achieved its primary objective of ridding the Nigerian banks of non performing loans which had the potential of triggering systemic distress in the Nigerian financial system. By acquiring 95 per cent of non performing loans in the nation’s bank, the financial system is left with about 5 per cent non performing loans which is the threshold of best practice internationally. The International Monetary Fund is saying that AMCON should not take on fresh non performing loans nor inject funds into any bank in a bid to recapitalize such bank. It should now confine itself to managing the assets it acquired from the banks.
But curiously AMCON has been acquiring even performing loans saying it is doing so to save the banks. Chike Obi had disclosed that AMCON had negotiated a takeover of some performing loans, particularly those involving Zenon Petroleum, Seawolf Industries and Geometric Industries from the banks, explaining that the decision was based on the fact that the debts posed a grave danger to the industry.
He said “Certain banks have been compelled, in consultation with AMCON and the CBN, to sell systematically important loans to AMCON to forestall any further crisis in the future. Notable among these are loans of Zenon Petroleum, Seawolf Industries and Geometric Power Industries, which owe banks N150 billion, N100 billion and N25 billion respectively”. The AMCON boss maintained that greater part of the next ten years would be devoted to recovering the NPLs. Chike-Obi said AMCON injected N736 billion into the three bridge banks, namely Mainstreet Bank, Keystone Bank and Enterprise Bank, adding that they were now performing their role in the financial community. He said the remaining five rescued banks had been recapitalised to zero level.
The reasoning at the IMF is that if AMCOM is allowed to continue its operation of acquiring non performing loans of banks it will pose a moral question as banks may have a field day in granting loans they know will not perform knowing that AMCON is there to absolve them. This kind of behaviour if allowed uncheck will endanger the financial services sector that AMCON was set up to arrest.
Last year some banks shareholders protested the taking over of performing loans by AMCON. The acquisition of over N275 billion of performing loans from some banks, by the Asset Management Corporation of Nigeria (AMCON) caused a disquiet in the industry, as operators regarded the action as an undue favour that is being exploited by the affected banks, to enhance their financial position, as the liquidity squeeze bites harder.
Coming at a time when the banks were intensifying their efforts to discount the zero-coupon bonds for cash, at the Central Bank of Nigeria (CBN), to beef up their liquidity position, the operators said the decision may have been deliberate and intent upon assisting the banks financially. Mustafa Chike-Obi had said that the need to forestall any likelihood of further crisis in the banking industry, and the fact that large sums were involved, led to the acquisition of N275 billion worth of performing loans, adding that the smaller loans were still being managed by the banks. Obi said that the possibility of the huge loans posing potential risks, having assessed the systemic risk linked to the exposures, made the AMCON to compel the banks to purchase the loans of Zenon Petroleum of N150 billion, with about five banks involved; Seawolf Industries (First Bank), N100 billion and Geometric Power Industries (Diamond Bank) worth N25 billion, from the balance sheet of the banks, at between 85 to 95 percent of the face value of the loans.
Analysts who gave the analysis of the Zenon loans, had said in their reviews that the five banks involved had on average, about 16 per cent of their capital and 6 per cent of their gross loan books exposed to Zenon Petroleum & Gas Limited. The cumulative exposure of these banks is $1.1bn and it is not a syndicated facility.
But operators were also faulting the potential risk to the economy and the size advanced by AMCON for taking over the loans, even after the banks flouted the single obligor limit, arguing that what the banks needed to do after venturing into such large exposures, was to syndicate the loans to other banks, thereby spreading the risks instead of AMCON taking over the loans. This is one of the several moral hazards and financial risk the IMF team spoke about.
But Diamond Bank at the time insisted that the Geometric Power facility, for which the bank had a total loan facility of N32 billion, was performing, while approval was given for exceeding the single obligor limit. CBN prudential Guidelines for banks, May 2010 on Limit on exposure to a single obligor/ connected lending says: “(a) The total outstanding exposure by a bank to any single person or a group of related borrowers shall not at any point in time exceed 20 per cent of the bank’s shareholders fund unimpaired by losses. (b) 331/3% of a bank’s off balance sheet engagements shall be applied in determining the bank’s statutory limit to a single obligor as per 3.2(a) above.
According to Rencap analysts, First Bank in July 2007, committed to jointly (with other financial institutions and investors) finance construction of oil rigs through SeaWolf Oil Field Services Limited, for servicing oil companies based in Nigeria. The bank initially disbursed the sum of $260 million to the company and in view of the project’s potentials, continued to fund the project when the other parties could not meet up with the funding agreement due to the economic meltdown and cash constraints. The bank sold the loan to AMCON at five per cent hair cut which the Managing Director complained in the open about.
Total industry Non Performing Loans as at mid 2012 was N339.88billion about 4.29 per cent of total banking credit of N7.87 trillion. A huge growth of NPLs, based on the fact that AMCON has foreclosed the possibility of further purchase of NPLs, banks are likely to hold more bad loans in 2013. From all indications the IMF has only reiterated what the Nigeria authorities have agreed to do as AMCON has foreclosed further purchase of non performing loans in Nigerian banks. It will now limit its operations to managing the assets it acquired and loan recovery which is in line with the IMF prescription.