The Bank of Ghana (BoG) has approved a loan write-off of GH¢1.2 billion to reduce the non-performing loans (NPLs) that are choking the banking industry.
This is part of efforts to sanitise the banking sector and restore investor confidence in a sector whose challenges have almost reached crisis levels.
The Governor of the BoG, Dr Ernest Addison, said at a Monetary Policy Committee news conference in Accra yesterday that the loan write-off would reduce the banking industry’s Non-Performing Loans (NPLs) from 21.3 per cent to 18.4 per cent.
“The quality of loans improved, as industry NPLs eased to 21.3 per cent in August 2018 from 21.9 per cent for the corresponding period in 2017,” Dr Addison said.
The stock of NPLs increased from GH¢7.1bn as of end-April 2017 to Gh¢8.63bn in April 2018, a new record high, the central bank’s report published in May noted.
Ghana News Headlines
For today's latest Ghana news, visit Graphic Online headlines page Ghana news headlines.
Though the industry’s Capital Adequacy Ratio (CAR) — the main solvency indicator — remains well above the statutory requirement of 10 per cent, the report noted that about a fifth of the banking industry’s loan portfolio was impaired or went bad between the period April 2017 and April 2018.
Policy rate maintained
Ghana’s central bank kept its benchmark interest rate unchanged at 17 per cent, as expected, due to the possible inflationary headwinds as the cedi depreciates against the dollar.
It was expected that the decision to maintain the policy rate would help cushion any spill-over effect from fuel price increases and a potential trade war between the United States and China, Dr Addison said.
Ghana is a major commodity exporter but its cedi currency has been unstable since May, touching new lows this month, as investors pulled away from emerging market assets.
“Given these considerations and weighing the balance of risks, the committee decided to keep the policy rate unchanged but will continue to monitor closely developments in the coming months and take the appropriate actions to address any potential threats to the inflation outlook,” Dr Addison said.
Analyst welcomes move
The Senior Economist at Databank, Mr Courage Kingsley Martey, has welcomed the decision by the central bank to reduce the banking sector NPLs to 18.4 per cent.
“If we currently have about GH¢1.2 billion already provisioned for potential bad debt, it is only prudent to effect this write-off in order to accurately reflect the fact that these capital losses have already been accounted for and taken out,” Mr Martey said.
“Otherwise, the risk is that you leave the market to continue thinking that a lot more capital losses remain to be suffered when, in fact, this has already been accounted for but not yet reflected in the NPLs account.
“If you don't write off, you risk over-stating the problems through a higher NPL which does not reflect the current state of affairs.
“This will get investors, depositors and key stakeholders to start seeing the positives of the ongoing reforms in the banking sector,” he added.
Mr Martey said the move by the BoG was prudent because it would send the right signals to the market that the banking sector reforms were yielding the desired impacts.
The increase in NPLs reflected the migration of some legacy loans to the non-performing category. Industry-wide, the banks were solvent and liquid, although signs of weakness remained. Asset quality continued to be a source of concern.
The private sector, which has the bigger share in total credit, compared with the public sector, accounted for the bulk of NPLs in the industry — although its share declined from 97.5 per cent in April 2017 to 90.7 per cent in April 2018, with the public sector’s share increasing from 2.5 per cent to 9.3 per cent over the same comparative period.
The sectoral breakdown of NPLs by economic activity indicated that the Commerce and Finance sector — with the greatest share of the outstanding balance at 25.1 per cent — also contributed the most to the industry’s NPLs, accounting for 29.2 per cent of the total in April 2018.
The Service sector, the report noted, accounted for 13 per cent of total NPLs outstanding as of end-April 2018 and the Mining and Quarrying sector, 3.5 per cent.
Efforts by the Bank of Ghana to address these weaknesses are expected to improve the sector’s performance in the medium term and are aimed at ensuring that the banking system is sound and capable of effectively playing its role in supporting and developing the economy.