Fitch Solutions is predicting further deterioration in loan quality in the coming months, although banks will try to improve their loan books.

According to the UK-based firm, the banking sector’s non-performing loans (NPLs) ratio rose sharply from 14.0% in October 2022 to 18.3% in October 2023, as high-interest rates, inflation, and weaker economic growth weighed on consumers’ ability to repay loans.

“We expect loan quality to deteriorate further in the coming months, although banks will try to improve their loan books. The sector’s non-performing loans (NPLs) ratio has risen sharply from 14.0% in October 2022 to 20.0% in August 2023 as an economic environment of high interest rates, inflation and weaker economic growth weighed on consumers’ ability to repay loans”.

The report also said the rising bad debts and weak loan growth in half-year of 2024 will lead to further deterioration in loan quality.

However, loan quality should start to improve in the second half of 2024 as the economic environment improves and banks make a concerted effort to improve it by reducing exposure to certain sectors.

The banking sector’s NPL ratio, Fitch Solutions, said is considerably higher than its peers in the African region.

It added that due to the very strong deposit growth and much weaker loan growth, the already low loan-to-deposit ratio will continue to fall in 2024. 

“As a result of very strong deposit growth and much weaker loan growth, the already-low loan-to-deposit ratio will continue to fall in 2024. Ghanaian banks have seen their loan to deposit ratio (LDR) trend downwards since 2008, when banks extended more loans than they received in deposits”.

Since then, banks have favoured investing in safer government bonds rather than engaging in riskier lending. Although we think that the DDEP will make investing in government securities less attractive in the coming months, very poor asset quality will continue to put banks off from extending loans”, it added.