The coming chaos in the banking industry

The hammer wielded by the Central Bank of Nigeria (CBN) that suddenly fell on Heritage Bank is, from my perspective, a forerunner to the coming chaos in the banking industry.

A few days ago, the country woke up to the CBN’s announcement withdrawing the licence of the Heritage Bank. The bank has been tottering for quite some time. In the few days before the hammer descended, there was the classic run on the bank, with depositors thronging its premises but failing to make withdrawals from their accounts. The aggrieved depositors were all over the media bemoaning their fate.

In the past, whenever such an occurrence reared its head, the CBN and the Nigerian Deposit Insurance Corporation (NDIC) would put their heads together and take out the Board of Birectors of the delinquent bank to pasture. In their stead, the CBN would then set up an interim management team to run the failed bank and also inject some appropriate amount to keep it running as a going concern. The new management team would be expected to sanitise the bank, stabilise its operations and prepare it for sale to new investors.

This is the neat arrangement the industry calls bridge banking, which its proponents expect to protect depositors’ monies, protect jobs in the industry and generally avoid an unsettled situation that would reflect unfavourably on the entire banking industry. On the flip side, public funds from the treasury would, in the short run, be injected into the failing bank to stabilise it, hoping that it would be recouped when it is eventually sold.

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This was done in many instances. Readers may recall the case of Sky Bank, which showed similar signs of distress and was taken by the CBN, rechristened Polaris and later sold to new investors.

The fate of Heritage Bank, unfortunately,  seemed unredeemable. They have consistently contravened provisions of the Banks and Other Financial Institutions Act (BOFIA) 2020.

As Daily Trust reported on Saturday, the bank “has insufficient assets to meet its liabilities; conducted its business in an unsound manner; failed to comply with specific obligations imposed upon it under BOFIA, 2020 and the Central Bank of Nigeria act, as well as rules, regulation, guidelines and directives made under both acts; critically undercapitalised with a capital adequacy ratio below the prudential minimum applicable to its license category; and its financial performance and condition constitute a threat to financial stability.”

I guess the condition of Heritage Bank had made it nearly impossible for the CBN to give it the treatment it allowed banks that had failed before despite the consequences of depositors losing their money and the workers of the bank facing the risk of being thrown into the job market.

At its demise, the bad debts reflected in the books of the bank were so heavy that the bank had no capital to speak of. It was not earning enough and was living from day to day on the largess of the CBN and what it could raise from other banks.

It was a basket case and would have been foolhardy for the CBN to continue to throw in public funds in the bank’s aid.

What worries many observers has been the inability of the CBN to take action on this bank that had shown clear signs of failure for quite some time. The present CBN board inherited the problem from the defunct Emefiele era.

It is a pity that Heritage Bank, when it berthed on the scene in 2013, came with a heavy baggage of problems. The bank was mid-wifed by Societe Generale Bank of Nigeria (SBGN) during the bank recapitalisation era. Before the creation of Heritage Bank, the SGBN had problems of its own. It could not meet the recapitalisation deadline of 2006 and had to engage the CBN in a court tussle to retain its licence.

When Heritage Bank commenced operation in 2013, and as time went on, it acquired other banks when they were offered for sale. Unfortunately, they were not diligent in their choice and fell into the trap of purchasing banks that had a legacy of large bad debts that remained baggage for them. Despite having some of the most brilliant bankers in their boardroom, Heritage Bank went from crisis to crisis until the CBN death sentence.

What is happening to Heritage Bank should be a pointer to the coming crisis. Insiders in the banking industry say there are other banks with similar ailments struggling in their death throes, yet the CBN is keeping them alive by keeping its lending window generously open. The coming recapitalisation, which has already been announced by the CBN, is bound to open more cans of worm now, up to March 31, 2016 to raise their capital base from N25 billion  authorised in 2005 to N500 billion for banks with international coverage.

Who in his right mind would pump in such humungous amounts into a bank with uncollectable large loans? One needs not be a seer to envision the failure of some of the banks standing now. However, the CBN can arrest the coming chaos by having the courage to deal with these unhealthy banks now. To continue to keep them afloat would only postpone their dying day.