Credit ratings agency Moody's has warned that the fortunes of Ghanaian banks could further decline on the back of increasing non-performing loans, which have already reached a 6-year high.

According to Moody's, the aggressive loan expansion drive undertaken by banks in recent times has put them in a situation in which the current “deteriorating operating environment and rising interest rates” could create further vulnerabilities for the sector.

“Ghanaian banks have enjoyed strong loan growth in the past few years, with loans and advances growing 41.5% in 2014 for example. Although loan growth declined to 24.9 percent in 2015, recent high growth has created a large stock of unseasoned loans; and we believe these loans create vulnerabilities given Ghana's deteriorating operating environment and rising interest rates,” the ratings agency said.

The average lending rate has increased to 32.1 percent as of April 2016, from 25.4 percent at the start of 2014.

The latest financial stability report of the Bank of Ghana showed that banks' non-performing loans ratio had increased to 14.7 percent at year end 2015, from 11 percent at year- end 2014. It had further grown to 16.2 percent as of March 2016.

“The rising non-performing loan (NPL) ratio is credit negative for Ghanaian banks, because as they require higher loan-loss provisions for the NPLs, it lowers profitability and impairs banks' internal capital generation. We believe that NPL ratios will continue climbing as a result of aggressive loan growth in recent years,” Moody's warned.

The country's banking system is dominated by short-term and variable-interest-rate loans, allowing banks to raise their lending rates upon renewal or re­pricing, thereby reducing borrowers' ability to service their loans, Moody's added.

The higher asset risks, the ratings agency continued, will require banks to increase their loan-loss provisions, which will eat into their profitability and reduce the amounts they can retain for capital.

“Banks' pre-provision income has been harmed by depressed revenues because of weaker economic growth and slowing loan demand amid rising inflation. Weak organic capital generation will hurt banks' capital, particularly as unanticipated credit losses are likely to rise this year,” it stated.

The central bank's financial stability report had attributed the banking sector's challenges to the general economic slowdown. Real GDP growth decelerated to 3.9 percent in 2015 from an average of 8.7 percent between 2011 and 2014.

In 2015, slower economic activity exacerbated by an energy crisis, rising inflation and interest rates, and a volatile and weaker local currency, the cedi, all negatively affected borrowers' repayment capacity.

The slowdown also affected government revenues, leading to delayed government payments to some corporates in the oil and gas and construction sectors in particular - negatively affecting those companies' cash flows and performances.