Bank of Ghana has revoked the license of two commercial banks - UT Bank and Capital Bank.
The action has been triggered by the inability of the two banks to turn around their negative capital adequacy position which has lingered on for some time now.
In simple language terms, the action has been taken against these affected banks due to their “terrible” financial situation and their inability to perform within the banking industry.
It is believed that the continued encouragement of the operations of these institutions could endanger the banking industry as a whole and hence the action that was taken against them over the weekend.
JOYBUSINESS understands that the Bank of Ghana was forced to take this action based on provisions of the current Banking and Specialized Deposit Taking Institutions Act.
In the law, Sections 104-107 discusses prompt corrective actions for banks with various degrees of capitalization requiring the regulator to step in after 90 days or 100 days, if the bank in question fails to recapitalise or submit to the Bank of Ghana, a capital restoration plan.
Also, in Section 123, the law empowers the Central Bank to REVOKE THE LICENSE OF ANY BANK THAT IS INSOLVENT OR LIKELY TO BECOME INSOLVENT WITHIN THE NEXT 60 DAYS.
The law specifically requires the Central Bank to appoint a receiver and take remedial actions against banks that have negative capital adequacy ratios.
Other analysts also say that the Bank of Ghana went ahead with this action because they were not satisfied with the capital restoration plans brought forward by these two banks, and the law grants them the powers to go along this path if it is not satisfied with proposed plans from the ‘sick’ banks.
The same banking law requires the election of an official administrator, either appointed by the Central Bank or a bank elected by the Central bank, to handle resolution proceedings by taking stock of loans that remain in good standing and deposits and take hold of the accounting books of the bank that has had its license withdrawn.
Observes in the Industry are e also attributing this quick action from Central Bank to some form of a subtle pressure coming from IMF to quickly deal with the situation of the affected banks before the IMF’s board meeting in Ghana which is slated to come on at the end of August 2017, or the first week in September 2017.
This action is likely to be tested by the Board for its overall consistency and long term impact on the economy.
Implications of the Action
This could mean that legally the two banks cease to exist as a bank, from today, Monday, August 14, 2017, that is why GCB has been appointed to take over the assets and liabilities of these two banks. This could possibly mean that all the workers, good loans and even the bad debts would be taken by GCB.
JOYBUSINESS understands that Government and SSNIT, the two major shareholders of the Bank have given their blessing to the move.
This would see the government take on the bad loans, a move that will worsen the overall fiscal situation. If the government, on the other hand, decide to issue bonds to cover the bad loan position of Capital Bank and UT Bank, so that, it does not affect the financial position of GCB, there would be implications for the country’s overall unfavorable debt position.
Since the two banks would legally cease to exist, GCB would also take up any contractual arraignment with its clients including good and bad loans. However, in the case of UT which is a listed entity, this development could possibly result in the institutions de-listing from Stock Exchange.
Investors could in the process, dump their UT shares on the stock and this could result in other secondary consequences.
Implications for Depositors Funds
Sources say there would be some communication out soon to assure depositors about the safety of their funds, to avoid any serious “run” on these institutions.
However, there is the likelihood of the imposition of limits on withdrawals in these institutions in the coming days. Already, there were signs over the weekend that the ATM’s of these institutions were not working in many places, a sign that the policy on the imposition of deposit withdrawals may be in force already.
Next line of action
The regulator could today move to seal off the premises of UT or Capital bank and open it later for business and inform staff of the two banks and even clients that a new bank, that is GCB has taken over.
So this could mean that GCB sign posts could be seen at the offices of the banks. Also, a public announcement could be made by the regulator today giving more details as to why they took this action and to assure depositors and business community that their funds are safe.
The government could also be coming out to assure the business community and even depositors on why it decided to allow GCB to take over these two banks and also assure donors, it would not have any serious impact on the budget deficit.
Impact on GCB
This would obviously lead to a substantial increase in the total assets of GCB, a development that could make it the biggest bank in the country and make it financing most of the biggest contracts in the country since this would improve the financial position of GCB.
It could also lead to GCB Bank getting some big and juicy deals.
Budding questions going forward
GCB Bank has the largest branch network in the country so when the whole acquisition process is completed, would it lead to the closure of some GCB branches?
What about the workers, how long can GCB absorb them?
Especially when there would be a duplication of functions?
What about the two Managing Directors of these institutions?
The transparency of the whole process is coming out to play regarding the conditions under which GCB was selected. Was there a competitive process put in place to select the receiving bank?.
If there were, what were the alternative acquisition offers that were put forward by the other big banks in the industry?
Which banks participated in the bidding process?
Was this solely a GCB Board room affair under the instruction of the Central Bank?
Last but not the least, one critical budding question we must be asking is how does all this fit into the policy of creating the Treasury Single Account where government's deposits liabilities are being transferred to the Bank of Ghana?
Will the banks survive or is this a point of inflection for the banks to begin to think and start doing real banking?
How did the two banks get here?
A lot of reasons have been assigned as to why the two have gotten here. One of them includes some loans that have gotten bad or funds extended to businesses that have not been paid on time.
Some people have attributed the management style of these banks in terms of credit delivery.