Nigeria: The Banker's Dilemma: Advancing Credit To The Power Sector Against Central Bank's Directive?

Last Updated: 25 April 2013
Article by Osaro Eghobamien SAN and Jennifer Omozuwa

In the wake of the Federal Government's resolve to invigorate the power sector in Nigeria, it has set in place a framework for the generation and distribution of energy in accordance with the implementation of the Electric Power Sector Reform Act (EPSRA), 2005. In furtherance of its objectives, the bid round for the generation as well as distribution companies was recently concluded by the Bureau of Public Enterprises with the emergence of a number of consortia as bid winners in a process that has largely been viewed to be in accordance with international best practice.

Quite naturally, the concerns of the winning companies, taking cognizance of the enormity of investments required in power projects must, amongst other things, including political and security issues, border on financing. In light of the reality that financing is critical, and given that for regulatory reasons the financing for these projects on behalf of any of the preferred bidders cannot be borne primarily by a single bank, there may be a need for companies to look towards a syndicate of banks as well as the Capital Market.

Regulatory authorities anticipating funding challenges and in an attempt to deepen the Capital Market, stipulated that financing will compulsorily have to be sourced partly through the Capital Market. In the event that the local Capital Market proves insufficient either because it is lacking in depth or sophistication, the power sector investors will simply go for cross listing (source for funds in the International Capital Market) thereby enhancing the Capital Market in other jurisdictions. To avert the loss that can arise from cross listing, to the developing Capital Market in Nigeria, it is imperative that adequate structures are put in place in preparation for the investments which will inevitably be channeled into the Power Sector.

Financing by the banks, and the ultimate off-load into the Capital Market should ordinarily not pose a problem. Once the collection of receivables from power retail is effectively managed, it can easily prove a dependable source for raising even more capital with the concept of securitization. This is particularly so as defaults in payment need not be enforced through a Court system that appears slow and inefficient. The system is likely to accommodate mostly pre-paid users leaving very little room for accumulated debt. Larger and more sophisticated consumers can simply be switched off should they fail to make payments for power consumption. These simple mechanisms of enforcement make investment in power extremely worthwhile provided appropriate pricing is in place.

Nonetheless, the recent announcement by the Central Bank of Nigeria (CBN), under the very watchful and able leadership of Mallam Sanusi Lamido Sanusi, that facilities ought not to be extended to certain named debtors presently indebted to AMCON (Asset Management Corporation of Nigeria), the Corporation that acquired the non-performing loans (NPL) from banks, introduces a new dimension and complexity.

Although the named debtors were originally indebted to deposit money banks, their debts were assigned to AMCON by virtue of an acquisition. This therefore made them extant debtors to AMCON. Also, given that the CBN and the Ministry of Finance are shareholders of AMCON, the debtors may be regarded, albeit loosely, as debtors of CBN and the Ministry of Finance. Partly for this reason, the threat by the CBN must be particularly worrisome to these debtors. More importantly, given the enormous powers of AMCON, a corporation that could possibly attach the asset of a debtor even if it was never offered as security for the existing debt, there is a need to consider in more detail the implications of this directive.

It is imperative to first consider the reason behind the directive. In more developed economies, bankruptcy and insolvency legislations serve as a major deterrent to debtors. There is the reasonable apprehension that a failure to perform obligations under financing agreements may result in the institution of insolvency or bankruptcy proceedings. The effect of such proceedings is that, persons who are declared bankrupt or Companies declared insolvent will not be legally permitted to apply for credit within a stipulated period. In Nigeria however, this is not the case as the bankruptcy laws remain obsolete; no one is ever declared bankrupt and no company is ever declared insolvent by a Court system that is slow and ponderous. Shareholders simply abandon a moribund Company, set up a new one and approach the banks for even bigger loans. Given these shortcomings in our legislations, it becomes easier to appreciate the CBN's display of frustration in assuming the role of a Court to effectively attach incidences of bankruptcy and insolvency to persons who were not otherwise so declared by the Court. While this directive may be reasonable, a thought must be spared for those who are genuinely contesting their debt with AMCON.

Interestingly, a number of the listed debtors form part of some of the consortia that have emerged as winners of the energy bids. The issue that then arises is, whether in spite of the CBN's advice, a bank may nonetheless proceed to fund a consortium having amongst its members, one or more of the debtors on the CBN's list. How may the CBN choose to enforce this directive?

The Central Bank of Nigeria is the statutorily appointed authority, regulating activities of banks. Amongst its regulatory activities is the method by which it treats loans (in the books of the bank) that have been given out by banks. A bank would ordinarily record the loans it extends to customers as its assets, since the bank expects to be repaid the principal loan and paid interest on the loan. These assets (loans) partly determine the worth of a bank. However, where the CBN is of the view that the loan remains outstanding beyond its tenure and there is a likelihood of default, it demands the bank to treat the asset in its books as diminished in value to the extent of the likely perceived default. Therefore, in the event that there is a perception that the loan will never be recovered, because it has been outstanding for a certain period it is depreciated to the tune of 100%. In other words, no value is credited to the bank. This automatically reduces the assets of the bank, which in turn affects its balance sheet through a reduction of its net worth thus affecting its ability to give or create new assets (further loans). All this has the ultimate effect of dipping the value of the bank's shares on the stock market. It may also have some impact on its regulatory Capital: that is, the amount of funds kept aside to support the business of the bank. This process of valuing the asset of the bank, making provisions for possible deficiencies in the quality of its assets is to give effect to the prudential guidelines. While there are set criteria by the CBN for making provisions against delinquent loans, this novel directive presently under scrutiny raises fundamental questions as to how assets created in defiance ought to be treated in the books of the bank by the regulator (CBN).

Given that a consortium would typically create a special purpose entity which would in its juristic capacity, source for funds for such projects, would a bank therefore be seen to have flouted the CBN's directive in the event that it decides to finance the special purpose entity which has emerged for the purpose of executing a power project?

Perhaps a way to address these concerns, may be for the CBN to require banks willing to take up the credit risk of a consortium having such challenges, to make provisions for such assets in its books on a dynamic basis, that is to say, on the basis of expected loss at the time of originating the facility as opposed to the conventional provisioning for assets on an incurred loss basis (i.e. on balance sheet dates). Traditionally, adequate provisioning is somewhat retrospective in that the quality of the asset is being assessed long after it has been given out. With the suggested approach however, the Bank is compelled to take a position about the loan from inception. This would enable the banks build up a buffer in their loan portfolio that could be utilized in the event of a failure by the consortium to meet its obligations under the financing agreement, without necessarily putting depositor's funds at risk. Undoubtedly this method of provisioning will make the loan far more expensive as the quality of the asset is doubtful from inception.

The Central Bank has taken a very bold step in issuing this directive, and what it seeks to achieve is well understood. However, it will have to be innovative in its enforcement since it does not appear to be backed by law. Introducing dynamic provisioning might just be one such step. It is important that the CBN is genuinely seen as maintaining financial integrity and stability and not perceived as the institution that scuttled the recovery of the Power Sector if it turns out that most consortia are unable to raise funds as a result of this directive. Either way, the failure of any bank to heed the directive might be most unwise with a Central Bank determined to actively utilize its powers and perhaps extend same if necessary.

Osaro Eghobamien SAN and Jennifer Omozuwa are both of the Banking and Finance Department of Perchstone & Graeys, a commercial law firm with offices in Lagos and Abuja.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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