Revised CBO regulations to have positive impact on bank lending

Measures unveiled by the Central Bank of Oman (CBO) on Monday will go a significant way in increasing the lending capacity of local banks, according to U-Capital, a leading independent investment banking platform. It includes a provision for the reduction of the capital adequacy ratio (CAR) of banks from 12 per cent to 11 per cent, which will reflect positively on overall credit growth. The change is expected to result in an increase in the volume of additional credit available to RO 7.8 billion, up from RO 5.2 billion, U-Capital said, citing local news reports.
“Therefore, including the capital buffer requirements, all banks are above the minimum stipulated including the buffers. However, it is expected to relieve pressure of raising further capital for banks on the lower end of spectrum. In 2018, the total CAR requirement is 13.5per cent and in 2019 it is 14.125per cent, excluding D-SIB charge.
The CBO has also allowed banks to include borrowing/placements, if any, from other commercial banks, in their deposit base and reduce, lending/placements, if any, with other commercial banks from the deposits base for lending ratio calculation purposes. All other extant instructions, including prohibition against Islamic Banking entities providing funds to conventional banks and applicability of present reporting requirements remain in force, U-Capital said in an advisory note to its clients.
The existing allowed maximum lending rate is 87.5 per cent. A larger deposit base in lending ratio calculation extends ability to provide greater liquidity in the market and will enhance overall credit growth. This will increase the ability of banks to lend, thereby improving liquidity management of banks in addition to stimulating the interbank market, it said.
Additionally, the CBO has removed the regulatory restrictions imposed on the risk weights to claims on sovereign and central banks, as part of its efforts to implement the guidelines of the Basel Committee on Banking Supervision.
“Initially, the claims on the Government of the Sultanate of Oman and the Central Bank, which are denominated and funded in Rial Omani, were assigned a risk weight of 0 per cent. Where the host country supervisors mandate 0 per cent or preferential risk weights on the claims on their Sovereigns (or Central Banks) that are denominated and funded in their national currencies, local banks could also assign preferential risk weights on such claims according to CBO guidelines. Banks could also use the consensus country risk classification of OECD for assigning risk weights,” U-Capital said.
The removal of such restrictions, the firm said, is expected to result in a reduction in risk-weighted assets used to calculate capital adequacy ratio, which in turn will further provide a boost to banks’ capital adequacy measures.
In order to enable the banks to manage their liquidity gaps more efficiently, the CBO has decided to increase the prudential limit for all currencies’ liquidity gap (as per cent of cumulative liabilities) from 15 per cent to 20 per cent for the 3-6 months buckets. Also, the CBO has revised for 6 to 9 months’ bucket and 9 to 12 months’ bucket from an earlier maximum of -15 per cent of the cumulative liabilities to -25 per cent of the cumulative liabilities.
“This would give banks more flexibility to utilize credit lines available to them with their foreign and local correspondents at a reasonable cost. We believe that this will lead to a better mobilization of the inter-bank market funds, resulting in lowering of cost of inter-bank funding rate,” it said.