Banks take GH¢300m hair cut : To salvage deteriorating VRA legacy debts

Author: Maxwell Adombila Akalaare
Mr Alhassan Andani — MD, Stanbic Bank, Ghana (left), Mrs Abiola Bawuah — MD CEO, UBA, Ghana and Mr Kweku Bedu-Addo — CEO, Stanchart, Ghana (right)

The Volta River Authority (VRA), through the Finance and Power ministries, has secured a landmark deal with some of its creditor banks that will see the banks lose a total of GH¢300 million in interest, fees and commissions in return for part payment of the debts which date back a decade.

The arrangement was reached between the two parties earlier this month and paves the way for the power producer to commence repayments of GH¢2.2 billion being first badge of the legacy debts. 

A successful implementation of the arrangement will make it the first time banks have openly taken a monetary hit to help the government pay up its indebtedness.

Cuts in interest rates

The GH¢300 million concession given by the banks resulted from their willingness to reduce the interest rates on the loans.

A July 11 statement from the VRA explained that the banks had agreed to a rebate of 3.5 per cent on the gross indebtedness of VRA to lending banks.

The maturity period of the loans had also been extended by five years with an option for repayment. While interest on the cedi-denominated loans had been reduced from 32 per cent per annum to 22 per cent, interest on dollar-denominated loans had been reduced to 8.5 per cent from 11 per cent.

The GRAPHIC BUSINESS has learnt that the move is an outcome of about two months of negotiations which hinged on how the government could help clear up the VRA’s indebtedness. The repayment is necessary to loosen the strain the debt is putting on the operations of the banks involved.

"This is something we both agreed to based on negotiations. It is not as if they imposed it on us," a source familiar with the discussion told the paper.

The VRA’s statement, which the paper has learnt was drafted in conjunction with the umbrella body of banks – the Ghana Association of Bankers (GAB) – explained that the payment would be funded by proceeds from the Power Generation and Infrastructure sub-account. 

The account is a creation of the Energy Sector Levies Act (ESLA, 2015), which was instituted last year to help gather money from consumers for energy sector expenses. 

Earlier estimates by energy sector think tank, the Africa Centre for Energy Policy (ACEP), found that the levy which pushed electricity and fuel prices upwards, could rake in GH¢3.2 billion annually.

Implications on banking sector

A banking consultant, Nana Otuo Acheampong, lauded the arrangement as good for the forward march of the banking sector.

He said the payment of the government debt would raise the liquidity status of the banks, thereby making it possible for them to lend more to businesses.

With more than GH¢2.2 billion held up for more than 10 years, the lending ability of the banks had been weakened while their non-performing loans (NPLs) ratio has increased.

As of March this year, net loans and advances totalled GH¢26.77 billion, representing an annual growth of 7.8 per cent, compared with the 41.2 per cent growth recorded in the corresponding period last year. 

On the other hand, NPLs worsened by 59.9 per cent from GH¢3.1 billion in March 2015 to GH¢4.9 billion in March 2016, something the Bank of Ghana (BoG) in part blamed on the increasing exposure of banks to the energy sector. 

As a result, the Governor of the central bank, Dr Abdul-Nashiru Issahaku, said his outfit was confident the payment plan agreed upon with the banks would help renew the confidence in the sector and cause them to lend more to the private sector.

The result will be an uptick in credit disbursement and a reduction in NPL ratio, which closed in March this year at 16.2 per cent.

He explained that the uptick in the NPL ratio was due to the reclassification of debts, which moved outstanding government commitments to high risk from the initial risk free.