BoG must do more
One of the biggest challenges that has confronted the banking industry in recent times has to do with net provisions for bad loans.
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It is a well-documented fact that many of the banks, especially the indigenous ones, were grossly overexposed to some of the utility companies, while others simply got their fingers badly burnt by supporting certain bad projects.
The Volta River Authority (VRA) owes the banking sector about GH₵3.2 billion and that is about 60 per cent of the NPLs of the banking sector. And to add to their woes, the finance and commerce sector also owed the banks US$300 million.
The net effect of all of these is that the capital of banks has considerably eroded which means their ability to finance big ticket projects is seriously in doubt.
The debt restructuring
Thankfully, the government has restructured the debt which means that it will use 50 per cent of the proceeds of the Energy Sector Levy to defray part of the debt owed by VRA.
It has already created an escrow account and some sort of instrument issued to the banks. They will hold it as the value of cash which they can rediscount in the market or hold to maturity.
They can leverage that to advance loans and/or borrow from their external partners to strengthen their balance sheet, so they can lend.
The arrangement is very important for growth in the economy because it gives banks a new lease of life to begin lending again. The payments by the government will strengthen their balance sheets for lending purposes.
Governor offers some explanations
At the last Monetary Policy Committee meeting (MPC) of the Bank of Ghana, the Governor of the BoG, Dr Nashiru Issahaku, offered some explanations as to why the central bank allowed the overexposure of the banks to the VRA.
However, the GRAPHIC BUSINESS wanted to understand why the Bank of Ghana gave the leeway for banks to get themselves overexposed to one customer, a no-no prudential norm of banks.
Dr Issahaku explained: “There have been strategic considerations here. If that was not done, you will find queues out there. Everyone will be queuing to buy fuel and energy to run our cars and that in itself, will impact on productivity and growth.
“As a central bank, we are also concerned about growth, not just to stabilise prices. We needed to take that into consideration. We strategically granted single obligor waivers to deal with situations such as these. That is why we granted some of those waivers, largely to deal with power and energy supply.”
The point was well made. But the question still remains, whether it was the most prudent way to support VRA, at the expense of the banking sector.
On the surface, it appears all is well with the banks, but the story is much different. The overexposure and the huge NPLs have taken a serious toll on their business.
Steps to strengthen the sector
The central bank wants to take steps to put the financial sector in shape. Already there has been an asset quality review for the entire financial sector. That included some of the exposure to the energy sector and a plan has been drawn with the banks to recapitalise and provide for all those assets that have been outstanding.
Dr Issahaku assured that “going forward, per our prudential bank supervision efforts, we are ensuring the following: that the banks
enhance their credit provisioning guidelines, enhance their risk management processes and other things that need to be done.”
“Also, to strengthen our own supervision and monitoring of these banks and the way they grant credit, certainly, the portfolio management process of the banks would have to be escalated to meet the demands of the central bank’s supervision,” he added.
Conclusion
Curiously, however, the Bank of Ghana still has to strive to stay within its own rules and supervision model. Not too long ago, the bank moved completely from the directive-based supervision to a risk-based supervision under the Basel II arrangement.
The risk-based supervision allows it to focus on areas that pose the most risk to a particular bank’s operations so that more resources and attention will be focused there and risk management measures put in place.
If even under this arrangement the central bank can allow banks to be so overexposed to the same customer, then it begs the question whether what it professes to do going forward can hold.
For now, the banking industry regulator should forge closer collaboration with all banks and be firm on their activities and operations. Yes, the industry may have quality and high calibre bankers, but they still need the whip and the prying eyes of the supervisor to avoid some tempestuous deals that present as mouth-watering sweet deals.
The reason the foreign banks most often than not avoid these pitfalls is because their parent banks and counterparts always act as watchdogs over the local operations. The second eye is always important.