Bank loans stagnate at GH¢36bn—Despite 300bps cut in policy rate
The banking sector has failed to grow its loan book beyond GH¢36 billion over the last three months, in spite of a historic cut in the Bank of Ghana’s policy rate within the period.
After opening the year at GH¢35.4 billion, total advances from the banking sector rose to GH¢36 billion in February and remained there throughout the next two months.
This means that while the BoG lowered its benchmark rate, the policy rate, by 300 basis points (bps) in the first quarter, ostensibly to inspire increased disbursement of low cost credit to the public, banks hesitated in creating new credits.
Two analysts, a former Deputy Governor of BoG, Mr Emmanuel Asiedu-Mante, and an economic analyst with Databank Financial Services, Mr Courage Kwesi Boti, blamed the disconnect on the high non-performing loans (NPLs) in the industry, which discourages banks from giving out new loans in the midst of decline in the quality of their assets.
“We need to look at the non-performing assets ratio. If that is going up, then it means the banks have deliberately applied the brakes because they cannot continue lending when they are not collecting,” Mr Asiedu-Mante, who retired from the central bank in 2006, told the Graphic Business on May 30.
Private sector credit
The NPL ratio, which measures defaulted loans as a per cent of total loans and advances at a given period, was 18 per cent in January but rose to 20.2 per cent in March before easing to 19.1 per cent last month.
Mr Boti, who tracks the performance of the economy for Databank Financial Services, said in a separate interview that the current state of the loan book meant that banks would prefer to use the extra liquidity coming from the policy rate cut to purchase treasury bills rather than lending it to the general public.
“We have realised that within the period that the loan book stayed at GH¢36 billion, commercial banks’ holdings in treasury bills and BoG’s open marketing operation (OMO) bills have increased significantly but credit to the private sector and the loan book has not grown that much,” he said.
Within the period, private sector credit (PSC) rose from GH¢30.4 billion in January to GH¢31 billion in April, representing some two per cent growth within the period.
Ill-timed reductions
Since November, last year, the BoG has taken a loose monetary stance by first lowering its policy rate from 26 per cent to 25.5 per cent in the last quarter of that year.
In March, this year, the bank surprised analysts with a 200 bps cut in the rate, citing the need to inspire growth in the midst of dwindling inflationary pressures. The same reasons anchored this month’s cut in the rate by 100bps to 22.5 per cent.
But while the economic environment provided room for a rate cut, Mr Boti of the Databank said the action was ill-timed, given the challenges with delinquent loans in the bank sector.
“Our view was that the BoG should have rather concentrated now on strengthening the banks and cleaning their books. Now that there is an energy sector bond in the offing to be used to clear the debts causing the high NPLs in the sector, we think the BoG should strengthen regulations, ensure stricter supervision and then wait until those debts are cleared,” he said.
“This way, a July cut will be more meaningful in the sense that it would have translated into lower credit cost and higher credit growth in credit to the private sector but they (BoG) thought otherwise,” he said.
He feared that banks’ inability to use the extra liquidity created by the policy rate cut into loanable funds could translate into price pressures, thereby undermining the stability seen in inflation. — GB