Thursday, 14 December 2017

CBN DEFECTIVE SANCTIONS FOR BANK DIRECTORS WITH BAD LOANS

Godwin Emefiele, CBN Governor
A new Code of Corporate Governance for Bank Directors was reported, the other day, to have been issued by the Central Bank of Nigeria (CBN). A noteworthy provision in the Code is the empowerment of banks’ Board of Directors to ‘remove or sack’ any director having non-performing loan(s).

The reason for this provision is, no doubt, to save the banks from insider abuses being perpetrated by directors of banks by borrowing money without repaying, a situation that portends serious problems for the banks.

While it is commendable that the CBN appears to have woken up to address a long-standing problem, given that responsibility for the implementation of the provision has been assigned to the board of banks, any jubilation must be with caution.

The reason is that CBN might not have foreseen situations where majority of a bank’s board members have non-performing credits. Who will then sack who in such situations? Or how easy would it be for the board to remove a dominant shareholder, who, as the chairman of the board, is a bad debtor? Certainly, by transferring its responsibility to banks’ boards rather than assume it, CBN is still treating the cankerworm of insider non-performing directors’ loans with levity.

Both Banks and Other Financial Institutions Act and the Central Bank of Nigeria Act empower the CBN to undertake such critical and important responsibility as removing banks’ directors from their seats if their actions or inactions pose threats to the safety, soundness, stability and sustainability of the banks and/or the banking system. And the CBN has played this role in the not too distant past where not just the entire boards but also senior management staff of some banks were removed and some prosecuted.

The rate of non-performing loans (to total loans) in banks is in excess of 20 per cent against the regulatory threshold of 5 per cent. Furthermore, bank directors are responsible for a substantial part of provisions of N856.9 billion for bad debts in banks. To worsen the situation and in contravention of provisions of BOFIA, 1991, most bank directors’ non-performing credits, far in excess of N50, 000, are unsecured.

Actions of the directors go against prescriptions of Code of Corporate Governance for Bank Directors and Ethical and Professional Codes of Conduct in the Nigerian Banking Industry. They threaten the health and soundness of banks and the system and thus, jeopardize the interest of depositors as well as other users of banking services in the country.

Indeed, bad loans significantly contribute to bank distress. In a 1995 collaborative study on Distress in the Nigerian Financial Services Industry, the CBN and Nigeria Deposit Insurance Corporation (NDIC) affirmed that ‘‘most commercial banks surveyed” attributed 30.1 per cent of institutional causes of bank distress to “bad loans and advances.” Besides, insider abuse of bank directors borrowing huge amounts without repaying falls within this realm.

Why would a bank director borrow money from the bank he is at its helm of affairs and fail to repay in line with stipulated terms? Would such a director have the legal or moral standing to accost other debtor-customers to repay what they owe? When bank directors who ought to be beacons of high integrity and good examples treat depositors’ money under their care as their personal fortune, they must be punished in ways that must remain in their consciousness for life. They must live with the consequences of cheapening themselves and acting imprudently with public assets. Such directors are not better than individuals who have been classified as ‘corrupt’ or ‘economic and financial criminals.’

Although a multiplicity of reasons may account for the misbehaviour of debtor bank directors, three can be considered most critical in encouraging them. One is that government has watched them contravene laws and regulations without imposing deterrent sanctions.

Second, the society accords them undeserved recognition. Third is that greed makes some bank directors believe that because they raised money to float a bank, they own all the money in such a bank and thus, deal with it however they want. That is, even when they know that their shareholders’ fund is very insignificant compared to the depositors’ funds (deposit liabilities). And the law often looks on helplessly.

Bank directors with non-performing loans must therefore repay their indebtedness without further delay. As for curing prevalence of bank directors’ non-performing credits, there is the need for the directors to separate their personal interest from that of their banks and to discontinue treating banks as their personal property.

The law and Corporate Governance Code must make provision for bank directors to go to banks other than the ones they superintend to process their requests and if approved, borrow from there.

This will ensure an arms-length evaluation, approval and handling of credit applications by bank directors. It will also curtail insider dealings and abuses. But it must then be the responsibility of the regulators and supervisors of the banking system to ensure that the ‘you scratch my back, I scratch yours’ syndrome does not arise to defeat the purpose of such provisions.

CBN must use the instrumentality of the law to deal with directors having bad loans and advances. In this instance, CBN must not delegate its statutory power to sanction to boards of banks.

By accepting and operating banking licences issued by the CBN, the directors agreed to comply with subsisting laws and regulations. Besides, it is CBN that screens nominees to ensure they are ‘fit and proper persons’ before they are appointed into boards and top management of banks.

If CBN’s ‘fit and proper persons’ screening process has failed (as evidenced by the misbehaviour of many bank directors), the law must not fail in adequately punishing such culprits.

Where subsisting sanctions provided in the laws and regulations are adjudged a ‘slap on the palm,’ amendments should be sought and obtained from the National Assembly for greater deterrent sanctions to be provided.

The National Assembly is hereby called upon to consider, with utmost urgency, proposals for enhanced sanctions to guarantee that those who put banks and the economy on perilous paths are visited with the severest sanctions. (Guardian)

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