Lenders in need of bail-out cash given strict Central Bank rules

 

In summary: CBK has set tough conditions for the money it has offered to bail out banks.
– The Central Bank has set tough conditions for the money it has offered to bail out banks facing liquidity pressures as a result of Chase Bank’s closure last week.
– The interest-free cash, which will be extended for between seven days to four weeks, will only be given to banks facing pressures that are not of their making.
– Banks will be required to present an action plan for getting out of their financial woes including re-establishing lines of credit with other lenders.
– They will also be required to reorganise assets, consolidate their investments and even present proposals for raising more cash from debt, equity and shareholders.
– The CBK boss said banks wishing to access the money will even have to go slow on lending and sell their foreign currency to raise capital.

The Central Bank has set tough conditions for the money it has offered to bail out banks facing liquidity pressures as a result of Chase Bank’s closure last week.

The interest-free cash, which will be extended for between seven days to four weeks, will only be given to banks facing pressures that are not of their making.

“This is not a loan, credit or a bailout. It is interest-free but CBK will be all over you if you are provided with this support,” the Central Bank of Kenya (CBK) Governor Patrick Njoroge told journalists on Friday.

Banks will be required to present an action plan for getting out of their financial woes including re-establishing lines of credit with other lenders.

They will also be required to reorganise assets, consolidate their investments and even present proposals for raising more cash from debt, equity and shareholders.

The CBK boss said banks wishing to access the money will even have to go slow on lending and sell their foreign currency to raise capital.

After receiving the money, the banks will be forced to submit daily and weekly reports to the regulator and will be subject to targeted inspection “every so often”.

“They must come up with an action plan, this is not a tap or an ATM,” he said.

The CBK governor said the measure is a new way of dealing with situations such as the one that Chase Bank faced.

Dr Njoroge said some of the lenders, including the big ones, have approached him to understand how the funds will be issued.

He however did not disclose the number of banks which have applied for the cash or even the amount CBK had already disbursed.

The Central Bank has other tools to support banks including overnight lending, the discount window such as buying back securities from lenders to release money into the banking system through reverse repos transactions.

The governor said the framework will help banks which do not even have the securities to trade and are struggling for funding on the interbank market as a result of the Chase Bank contagion which may have seen financial institutions lend less to each other.

Last week, CBK also extended the window for reverse repos by increasing the time it will hold securities from banks from one week to a month