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Banks face sharp profit decline — Lending to private sector to suffer

BY: Maxwell Akalaare Adombila

BANKS face a major hurdle of getting enough cash to meet a new requirement that risks sucking GH¢4 billion from them and cutting their profits by a third this year.

While some of the lenders have been forced to borrow to meet the requirement, others are discounting some of their investments to help raise the equivalent of three per cent of their total deposits to be able to comply by November.

For consumers and businesses, some of their loans risk being frozen as the banks find ways to raise adequate liquidity to stay within the new threshold.

This follows the increment in the cash reserve requirement ratio of banks from 12 per cent to 15 per cent last week.

Defending cedi

The Bank of Ghana (BoG) directive seeks to lock up more than GH¢20 billion of banks’ deposits in the central bank’s vault by November when the measure should be fully complied with to help reduce money supply and cut speculative powers on the cedi.

The local currency fell by more than 25 per cent as of mid-August, forcing the August 17 emergency Monetary Policy Committee (MPC) that accelerated the pace of monetary tightening.

Earlier in March, BoG raised the reserve ratio to 12 per cent, returned the capital conservation buffer (CCB) of banks to three per cent for the capital adequacy ratio (CAR) to rise back to the 13 per cent, and also reset the provisioning rate for loans in the other loans exceptionally mentioned (OLEM) category to the original 10 per cent

Implications

The Chief Executive Officer of the Ghana Association of Banks (GAB), John Awuah, told the Graphic Business on August 22 that banks had challenges meeting those requirements in April when the directive took full effect.

He said similarly, complying with the new cash reserve ratio would be costly in the short term and profit-draining in the long run.

“Meeting the requirement will come at a great cost to banks, no doubt about that but we will try to meet it.”

“Do not forget that banks exist to take money and lend, and if your ability to lend is hindered by a directive to increase the liquidity that is available to you, then if you do not lend, you do not get money and banking profit will decline,” the former Chief Executive Officer (CEO) of the Universal Merchant Bank (UMB) said.

“So, the market should expect a decline in profit of banks and a decline in lending because as a country, we have decided to priortise stability over growth,” he added.

Loans

Mr Awuah said the policy would reduce lending.

Some banks could also recall some loans as they find ways to raise adequate liquidity to be able to stay within the new threshold, Mr Awuah added.

Giving that lending is a major revenue earner for the banks, he said cutting it would affect revenues and ultimately, profits.

The gross profit of the sector fell to 22.1 per cent last year from 27.2 per cent in 2020.

Monetary tightening

Since November last year, the central bank has been on a tightening spree as inflation bolted from its target band into double digits before peaking at 31.7 per cent in July this year.

The committee, chaired by the Governor of BoG, Dr Ernest Addison, raised the policy rate by a total of 8.5 percentage points from 13.5 per cent in September 2021 to 22 per cent this August.

At the emergency MPC last week, the MPC hiked the rate by three percentage points to 22 per cent, raised the cash reserve ratio to 15 per cent and announced plans to purchase all foreign exchange that exporters will repatriate voluntarily.

The Head of Research at BoG, Dr Philip Abradu-Otoo, said last Friday that the measures were necessary to help reduce the public’s purchasing power and cut the amount of money available to bet on the currency.

No excess liquidity

The CEO of the GAB said while his outfit appreciated the position of the central bank, it did not think that there was excess liquidity in the system that required the current tight policy stance.

Mr Awuah said if there was excess liquidity as BoG was saying, the government would not have been suffering persistent and huge auction failures.

He said the government’s inability to get enough funds from the public for treasury securities sold was evidence that the market was stressed of liquidity and any effort to tighten further would only hurt the players, including banks.

He cited potential freeze in existing loans as one of the effects that the current policy stance could lead to, but said he did not expect it to be pronounced.

“In every loan agreement, there is a clause in there that the bank reserves the right to recall the loan in times of emergencies and that is what can happen in times like this,” he said

Curb forex sales

On defending the cedi, Mr Awuah said the country needed to make it more expensive for the public to transact in foreign currencies, noting that the rampant sale of US dollars across the country was the bane of the currency.

“So long as there is an avenue to speculate on the currency, and the forex bureau are deeply involved in it, I am sure the pressure will continue to be there.”