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Bank of Ghana warns banks against slashing loans 

Millison Narh, Acting Governor of Bank of Ghana

The regulator of Ghana’s banking industry the Bank of Ghana has warned banks in the country against cutting back credit to their customers.

Majority of banks in the first quarter of 2016 begun cutting back credit to customers following a significant increase in Non–performing loans (NPLs).

As at March 2016, the sector comprised 29 banks, of which fourteen were domestically controlled.

The banks managed 1,173 branches and 912 Automated Teller Machines (ATMs) distributed across the ten regions of the country.

Non–performing loans on the books of banks in the country however increased by 59.9 percent from GH¢ 3.1 billion in March 2015 to GH¢ 4.9 billion in March 2016.

Though the Bank of Ghana has admitted the growing spate of nonperforming loans on the books of banks is the key risk facing the banking sector, even though generally the overall performance of the banking sector in the first quarter of 2016 remained strong, it fears the move will have adverse implications on their profitability.

Bank’s income dwindle

Interest from loans continue to be the main source of income for banks in Ghana, the second highest is from fees and commissions while the rest is from investments including treasury bills, shares and other equities.

In March 2016, interest income constituted 49.8 percent of total income compared with 48 percent in March 2015.

However, the share of investment income in banks’ total income declined marginally from 32.6 percent in March 2015 to 32.3 percent in March 2016.
The share of income from fees and commission however remained unchanged at 11.4 percent in March 2016 compared with a year earlier.

But with the growing spate of bad loans on the books of banks they have been forced to cut credit to customers.

A lot of factors have been attributed to the increase in bad loans including the country’s economic challenges, the power crisis and increasing cost of production due to high utility tariffs.

These factors have forced companies a majority of them who are defaulters of the loans to be unable to pay back.

Defaulting customers

According to the central bank’s latest financial stability (May 2016) report credit to the private sector contributed 94 percent of the total banking sector’s non-performing loans as at March 2016, slightly down from 96.8 percent in March 2015.

Even though private enterprises received only 69.9 percent of the private sector credit, they accounted for 86.9 percent of NPLs as at March 2016.
The proportion of banks’ NPLs attributable to the public sector increased from 3.2 percent in March 2015 to 6.0 percent in March 2016.

The highly disproportionate level of NPLs associated with the private enterprises was driven mainly by indigenous enterprises, which received 60.9 percent of credit to private enterprises but accounted for 77.8 percent of NPLs as at March 2016.

Even though the share of foreign enterprises in total private sector credit declined from 12 percent in March 2015 to 9 percent in March 2016, its contribution to private sector NPLs increased from 7.8 percent to 9.2 percent during the review period.

Households’ share of private sector credit and contribution to NPLs declined over the review period.

Sectors pushing NPLs up

Commerce and finance sector continued to account for the largest amount of the banking sector NPLs followed by services, and agriculture, forestry and fishing.

The three sectors accounted for 72.6 percent of NPLs in March 2016 compared with 54 percent in March 2015.

Electricity, water and gas sector recorded the lowest NPL ratio during the review period.

Another move that has seen loans defaults on the book of banks to shoot up is the reclassification of the loan portfolio of banks.

The banks in a bid to deal with the troubling development have commenced cutting back credit to consumers.

BoG’s fears

But the central bank warns while a slowdown in credit delivery may moderate the accumulation of NPLs, it has adverse implications on the profitability of banks.

It argues that since credit delivery is the core business of banks the move will hurt their revenue and rather says banks must intensify their loan recovery efforts alongside tighter credit risk management practices in order to minimize losses from non-performing loans.

Banks profits dip

But the central bank’s fears have already started reflecting in the industry for example profitability Indicators of profitability for the banking industry showed some deterioration in banks’ earnings performance for the period ended March 2016.

The industry’s net interest income registered a growth of 14.8 percent in March 2016 compared with 37.3 percent growth registered in March 2015.

The sector’s income before tax registered a negative growth of 1.0 percent in March 2016 compared with a growth of 31.8 percent in March 2015.

Similarly, the industry’s net profit after tax contracted by 2.6 percent in March 2016 compared with 24 percent growth in March 2015.

The key risk facing the banking sector is the deteriorating asset quality as evidenced by the almost 60 percent increase in banks’ non-performance loans between March 2015 and March 2016.

Cuts in energy loans

Meanwhile the Bank of Ghana believes ongoing efforts to reduce the banking sector’s exposure to the energy sector will boost improvements in the asset quality of the industry over the medium term.

Government is 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.

The development has been attributed as one of the cause of the significant rise of bad loans on the books of banks recently.

Government last month promised to clear the debts by the end of June, 2016, which were accumulated over a period of two years.

Earlier the running Mate of the New Patriotic Party (NPP) Alhaji Dr. Mahamudu Bawumia warned the banking industry will be hit with a crisis if government fails to settle debts owed bulk oil distribution companies soon.

‘The BDC debt is a real threat to the banking system. Our banking system will suffer a crisis if we do not take care. The banks are exposed to the BDCs some of the banks if the BDCs don’t pay will collapse. 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.

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