Auditors Blame Naira Devaluation For Banks’ Single Obligor Limit Breach

Chief audit executives under the auspices of the Association of Chief Audit Executives of Banks in Nigeria (ACAEBIN) have said the devaluation of the naira in recent times is a contributing factor to the breaching of the regulatory Single Obligor Limit (SOL) by banks in the country.

Speaking on the sidelines of the 61st quarterly general meeting of bank auditors, the chairperson, ACAEBIN, Aina Amah, described the regulatory breach as a systemic problem, noting that, bank loans denominated in foreign currency  have ballooned in naira terms due to the steep depreciation of the local currency.

Over the past two years, the value of the naira had depreciated from N465 to the dollar in June last year to hover around N1,600 this week, a 245 per cent depreciation of the naira over 24 months. However, Amah noted that banks are already working towards ensuring that the breach is rectified.

The Single Obligor Limit, a prudential guideline issued by the Central Bank of Nigeria (CBN), restricts the maximum exposure a bank can have to a single borrower or group of related borrowers to reduce concentration risk.

“This forex situation is the worst it has ever been in our history. Nobody wants to breach the limit deliberately, but when the dynamics of FX change so drastically, it alters the entire transaction structure,” she said.

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She added that banks are now being forced to think outside the box to mitigate the risk, with some opting to renegotiate facilities with clients or convert foreign currency loans into naira to minimize volatility and regulatory pressure.

“Some banks are already in discussions with customers to convert dollar-denominated loans to naira, to reduce the toxic exposure from chasing an unstable exchange rate,” she said, adding that, the federal government and the Central Bank of Nigeria(CBN) work towards addressing the forex inflow challenges of the country.

“If we deal with our forex issues, if we have more forex inflow, the exchange rate will come down ultimately and people can play within the approved limit. Nobody will deliberately want to breach but because this forex situation is the worst it has ever been in our history, that is what is causing many banks to breach the single obligor limit for facilities that are forex based

“Banks have now had to think outside the box as some of them are considering whether they still want to continue to carry the FCY facility or have an arrangement with the customer to convert the loan  to local currency, thereby reducing the challenge of chasing exchange rate. So it is a systemic risk, and I think the CBN should also see this reality and see how to help the nation increase our FCY earnings,” she stated.