The Bank of Ghana (BoG) has directed each of the 32 banks to submit credible plans on how they intend to address the high non-performing loans (NPLs) in the banking sector, which ended in October at 21.6 percent – almost five times higher than the global standard of below five percent.
The directive was issued on November 28 at a meeting between the central bank, led by the Governor, Dr Ernest Addison, and chief executives and other senior management of the various banks, a source told the GRAPHIC BUSINESS.
The banks are to respond with their written proposals before the end of this month, the source said and explained that the BoG was expected to vet the responses against the peculiarity of each bank’s predicament to be able to take a decision.
“They (BoG) were very concerned about the total NPLs position in the industry, which is still high, and they want us to present our plans as to how we will reduce them.”
“The plans should be name by name for each of the banks. Each bank is to submit their non-performing asset (detailing) line by line customer reduction plans,” it said and added that the directive was expected to signal to the banking industry that the central bank was focusing its attention on delinquent loans.
Another source explained that the directive further showed that the central bank had taken a serious view of the persisting high NPLs in the banking sector after recent efforts by the government, through the issuance of the energy bond, to address its indebtedness to the banks failed to yield the necessary results.
NPLs, which have been a bane of banks in recent times, constitute loans that are either in default or close to default. In Ghana, as it is the case everywhere, the repayment of every loan that is 90 days or more overdue is classified as non performing loans.
Trend of bad loans
BoG’s latest directive on NPLs is a clear signal of the threat that it poses to the central bank’s capital restoration, financial sector stability and credit easing agenda.
The bank’s data showed that in October, this year, the NPL ratio had reached 21.6 percent, equivalent to GH¢8.3 billion of total advances (GH¢38.4 billion) within the period.
The figure was 19 percent in October 2016 but grew by 13.6 percent within the 12-month period. This was after new NPLs, mostly from the private sector, added to the government’s indebtedness – the legacy debt – arising from the energy sector.
Although the NPLs ratio dropped to 17.7 percent in February this year, the data showed that it afterwards remained above the 20 percent threshold, with September’s close of 22.2 percent being the highest.
This is not healthy for the banking sector, Mr Asiedu-Mante, who retired from BoG in 2006, said.
“Ideally, every loan should be collected because it is depositors’ money. However, if the NPL ratio of a bank goes beyond five percent, then it should be a source of concern to BoG and the management of that bank,” he said on December 1.
He was confident that the plans requested by the BoG would lead to inform decisions on how to address the challenge once and for all.
“If it turns out that 70 percent of the debt outstanding is owed by the government, then pressure would have to be put on government to pay the banks so that they can be viable again. If that is the case, then between the BoG and Ministry of Finance, some arrangement has to be worked out so that the government will pay the banks.”
“But if it is owed to the private sector, then Central Bank will put pressure on the banks and they will, in turn, put pressure on the defaulters to pay up,” he said.
A former Deputy Governor of the BoG, Mr Emmanuel Asiedu-Mante, told the GRAPHIC BUSINESS in a separate interview that the directive was “good for decision making” by the central bank.
A banking consultant, Nana Otuo Acheampong, however, wondered what the impact of such plans would be on the situation, given that the NPL issue was not within the remits of the banks.
“I have to explore as to what they mean by plans. What plans can they make if someone owes you and has not paid other than asking the person to pay,” he asked.
“The plan should rather come from the government on how they want to deal with their indebtedness,” he said and explained that about 70 percent of the NPLs were traceable to the government under the legacy debt.
High NPLs has an adverse impact on the capital adequacy ratio (CAR) of banks, as those with NPLs are mandated by law to make provision for them set aside a portion of their capital to be used to pay off such debts.
In August this year, UT and Capital Banks collapsed following a consistent deterioration in their CARs on the back of mounting NPLs.
Impact on capital
On the impact of the NPLs on the banking sector, Nana Acheampong said: “It creates a big hole in the balance sheet of the banks.”
“The CAR looks at the available capital that you have and if you give a loan that has not been repaid, it reduces your capital. Generally, NPLs have a big and direct impact on banks’ capitals,” he explained.
The CAR has hovered between 17 and 14 percent since January this year. It opened the year at 17.8 percent but fell to 14.4 percent in July. The BoG reported it at 15 percent in October.