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Banks risk prosecution over lending to states

By Geoff Iyatse, Assistant Business Editor 
02 November 2021   |   4:15 am
Deposit Money Banks (DMBs) lending to state governments and other public sector operators on moral suasion risk prosecution as the Fiscal Responsibility Commission...

Deposit Money Banks

• We may involve EFCC, FRC threatens as fear of default spreads
• Financial institutions wary of granting govs’ fresh loan requests   
• 13 states yet to fulfill 2016 bailout fiscal responsibility conditions 

Deposit Money Banks (DMBs) lending to state governments and other public sector operators on moral suasion risk prosecution as the Fiscal Responsibility Commission (FRC) threatens to drag erring financial institutions before the Economic and Financial Crimes Commission (EFCC).  
The threat comes on the heels of fear of default by some state governments whose contracting revenues can no longer service their debts. 

The Guardian was informed yesterday that many banks are facing herculean tasks getting some sub-national entities whose debts have mature to fulfill their obligations.
A source said the majority of banks are currently in talks with state governments on the possibility of restructuring commercial loans due for repayments, an exercise described as an endless part of the relationship between the lenders and the political entities. 

While some negotiations on repayment have stalled, investigations have shown that many bank chiefs are extremely wary of approving fresh loan applications by state governors. Sources said the “banks have realised the urgent need to scrutinise the applications against repayment capacities of the states and be firmer in considering fresh applications.

“What the banks trade with is depositors’ money. Public sector lending is becoming riskier. The states may not fail but if you have an asset that you are not sure you will be able to liquidate, there is a serious concern. That is where the banks are in relation to public sector lending,” a source said yesterday.   
Earlier in the year, The Guardian reported that state governments were in dire straits as make-up funding sources dried up amid tumbling earnings, crippling their ability to repay existing loans and meet essential obligations.
Finding had suggested that many state governors, amid growing liquidity, were queuing for commercial loans to offset “spending plans and schedules” that could not be deferred.
At an ongoing two-day Fiscal Responsibility and Accountability Sensitisation Workshop, Executive Chairman of FRC, Victor Muruako, confirmed the rising risks posed by reckless state borrowing and warned that the Commission would not condone the blatant disregard for due process in procuring such loans.
“We also wish to use this opportunity to discourage the bad habit of some sub-national governments to make loans their first and last consideration for meeting revenue shortfalls rather than considering ways of harvesting their dormant potentials for Internally Generated Revenue (IGR).

“As for banks and other financial institutions that make themselves willing tools of fiscal carelessness by granting loans to some sub-national governments without regard to due process, the Commission hereby reminds them of Section 45(2) in Part X of the Fiscal Responsibility Act 2007, which specifies conditions for borrowing by any government in the federation or its agencies and corporations. It reads ‘lending by banks and financial institutions in contravention of this part shall be unlawful’.

“In line with the foregoing, the Commission hereby serves notice to defaulting banks and other financial institutions that the window of just using moral suasion is closing. Going forward, we intend to invoke the provisions of the law against this expressly defined unlawful act, wherever it rears its head. Where FRA, 2007 appears inadequate to compel, we shall aggressively invoke our collaborations with sister agencies such as the Independent Corrupt Practice and other related offenses Commission (ICPC) and EFCC,” Muruako warned.    
The executive chairman appealed to states to join in the efforts to achieve the cardinal objectives contained in the FRC Act to create a sustainable economy.

He recalled that bailout funds extended to states in 2016 were conditioned on the domestication of fiscal responsibility law by the states. According to him, some states have merely domesticated the law to attract donor funds without operationalising the agencies.
From information sourced from the FRC, 23 states have successfully domesticated the law while 13 are yet to do so. The 13 states are Rivers, Imo, Akwa Ibom, Kano, Kastina, Borno, Plateau and Ogun. Others are Oyo, Zamfara, Ondo, Edo and Benue.
Yet, Muruako said the journey towards achieving fiscal sustainability was more in operationalising the tenets rather than merely creating a lame law. He warned that the weak fiscal governance of sub-national entities comes with a huge risk to the national economy.
“We are bothered that though Nigeria and its constituent states constitute a single national economy and that it is clear to all that the Federal Government is exerting itself to make things better at the level of fiscal governance, many states still operate as though they are only aware of macroeconomic challenges to the extent that it impinges on their monthly FAAC allocations,” he said, adding that the states have simply turned on the tap while the FG is moping the water.
Also speaking, Head of Directorate of Legal, Investigation and Enforcement, FRC, Charles Abana, said banks are required to seek clearance from the Commission before lending to state governments. He warned that subsequent governors could turn down repayment of loans that fell short of the law, – a situation that could lead to default.
Abana said: “It is an aberration for any government to borrow to pay salaries” as its law is clear on the purpose of public loans. Both federal and state governments have in the past borrowed money for payment of salaries.
A civil society leader and Lead Director of the Centre for Social Justice, Eze Onyekpere, berated the political leaders, insisting that any state government that “cannot generate enough to pay salaries, cover overheads and service its debts has no claim to existence as a political unit.”    

A professor of applied economics, Godwin Owoh, confirmed that most states hide under the cloak of sub-national guarantees to facilitate commercial loans extended to government contractors and that the lenders face huge risks as public revenue dwindles with the states unable to raise their IGR profiles.

Owoh said the state assembly oversight mechanisms are weak or compromised while the Debt Management Office (DMO) could only control external borrowings, “as they are backed by a sovereign guarantee and pass through the Federal Government. 
“They have always used the contractors for some of those loans. There cannot be a cross guarantee. So, the states provide guarantees with which the loans are procured. The challenge is that the risk level of the loans is too high. The default will come when the tenures of the governors that took the loans expire as their predecessor may review the loan agreements,” Owoh said.
Commercial banks’ exposure to the public sector has increased disproportionately in recent years. For instance, the total commercial loans to the government, at all levels, rose to N1.8 trillion at the close of last year, about 18 per cent increase from the N1.5 trillion reported in December 2019. The amount was a little below 10 per cent of the total N20.4 trillion loan portfolio of the banks at the close of the year.

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