8 banks on the verge of collapse – Bawumia

Dr. Mahamudu Bawumia has warned that eight banks in Ghana risks collapse due to the continuous hikes of bad loans on their books.

“The asset quality review of banks, conducted in 2015, shows significant vulnerability of banks to current economic conditions and that if the affected banks were to fully provision for all the bad loans, a significant number of them will collapse.

In fact eight banks were identified to exhibit significant weaknesses with capital adequacy ratios of below 10 percent and some below 5 percent and nearing collapse so it is a real problem.”

Dr Bawumia stated at a lecture on the topic, ‘The State of the Ghanaian Economy – A Foundation of Concrete or Straw’.

The identity of the eight are not known but industry players have cautioned their collapse will destabilize the financial industry and in turn the economy.

The Bank of Ghana, in its first financial stability report for 2016 revealed that bad loans on the books of commercial banks in the country increased by 14.9 percent to 4.52 billion cedis in 2015 against the 2.72 billion cedis recorded in 2014.
The central Bank earlier admitted the growing spate of nonperforming loans on the books of banks is the key risk facing the banking sector.
Dr Bawumia believes the development is troubling.
“Bad loans in the banking sector have risen significantly; economic and financial data from the central bank shows that NPLs have risen sharply from 11.2 percent in May 2015 to a critically high 19.3 percent in May 2016.
The level of impaired loans in one of the largest commercial banks has quadrupled and the situation is becoming widespread in the banking sector. Available information show that due non-payment of these loans, the banks have declared 2.4 billion cedis of outstanding debt stock of loans as a complete loss and are making provisions against profits. Certainly these resources could be channeled to create more industries in our communities.”
Driving force behind growth in bad loans
A number of reasons have been attributed to the increase of NPLs on the books of banks in Ghana. These include the country’s economic challenges, the ongoing energy deficit crisis, debts owed by government to utility and oil companies in the country among others.

State owned Volta River Authority (VRA) alone for example owes about 13 local banks [Ecobank, Stanchart, Unibank, Zenith bank, GT bank, UBA, UMB, CAL bank, ACCESS bank, Stanbic bank, Fidelity bank, Firs Atlantic bank and Ghana International bank] in excess of 1.1 billion dollars as at March 2016. The figure is minus current interest, roll over fees and other charges and expected to run in excess of 2 billion dollars when these are added.

Managing Director of Stanbic Bank Ghana, Alhassan Andani speaking on the NPL earlier to Citi Business News said “nobody wants NPLs as they are a hardening of your assets which is supposed to be soft and running and earning you interests.

NPLs are therefore not desirable anywhere with the banks.
A large portion of the NPLs can be traced down the energy sector, that is the BDCs and VRA plus the power sector issues that are being deregulated and put on sound footing,” he stated.
Government is also currently indebted to about 17 Bulk Distribution Companies (BDC)s in excess of 500 million cedis.
Majority of the BDCs contracted loans from commercial banks in the country to facilitate their operations but have failed to pay up the loans due to government’s indebtedness.
A former deputy Governor of Ghana’s central Bank Dr. Mahamudu Bawumia, earlier warned a number of banks risk collapse if the BDCs debt is not settled soon.
‘I am very worried and concerned because of the former position i held and this BDC issue is a major threat to the banking system and it should be addressed or a number of banks will collapse because of the debt’.
He said.

Another development which has led to NPLs in the banking industry to shoot up is the inability of companies especially those in the manufacturing industry to pay back their loans due to the energy crisis that recently hit the country.
Quite a number of bankers have also attributed loan defaults on the book of banks to shoot up is the reclassification of the loan portfolio of banks in line with international practices.