The Central Bank has said untrained staff in the banking sector and the high cost of borrowing are major causes of rising loan default.
Non-performing loans in the sector currently stand at 14.2 percent high, above the accepted benchmark of 5 percent.
According to statistics from Rural Banks Performance Report as at March this year, 98 out of the 121 rural banks have a non-performing loan ration above the 5 percent benchmark.
Regional Manager of the Central Bank, Micheal Anyamesem, warns banks risk collapse if the trend is not reversed.
“Untrained staff in the rural banks handling sophisticated transactions and the high cost of borrowing as a result of stiff competition is the cause of the high numbers of non-performing loans,” he said.
Meanwhile, Mr. Anyamesem urged members in the rural banking sector to adequately resource it internal audit units to effectively function.
He, therefore, urged the rural and community banks to strengthen their internal control and governance systems for efficient operations.
The bank official observes one of the main failures of rural and community banks is to with weak corporate governance systems.
“There is the need for rural and community banks to strengthen their governance and reporting structure,” he said.
According to him, directors must upgrade their skills and knowledge in corporate governance in order to effectively interrogate financial statements submitted to them by management.
To ensure good corporate governance in the banks, the Bank of Ghana has developed Corporate Governance Directions and Regulations which among other things limits the tenure of directors and external auditors.
It also stipulates the possession of certain competencies by directors, installations of good internal controls as well as compliance systems that will be applicable to all regulated institutions by the bank.
Chairman of the Association of Rural Banks, Nana Dr. Akowuah Boamah, describes non-performing loan ratio as a thorny problem in the sector.
“You need to give loans because you are helping people to develop their businesses, If people get loans and they don’t pay back, they are making it difficult for other people to benefit from loans”.
He charged loans and credit officers to sit up and design ways of getting loans back.
“Make sure that when they are doing the appraisals, they do them properly so that you don’t just give loans because somebody need loans and you want interest after the loans”.
To address the situation, Head of Banking at ARP Apex Bank, Maxwell Donkor, says the profitability performance of banks can be improved if credit management is strengthened.
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