The hopes of bank customers to have a drop in interest rates within the shortest possible time following a reduction in the central bank’s policy rate last Monday will be dashed as banks are unlikely to react accordingly in the nearest future.Follow @Graphicgh
According to some heads of universal banks in the country, a drop in the policy rate from 22.5 per cent to 21 per cent cannot immediately translate into reduced interest rates on loans.
They maintained that much as the reduction signals a positive trend in macroeconomic dynamics, there was the need for customers of the banks to manage their expectations because there were other factors, including interests payments on fixed deposits that go into calculating interest rates.
Some interest rate determinants
The policy rate is a major determinant in the calculation of banks’ interest rates. It is usually used as a benchmark because that is the rate at which the central bank lends to the universal banks.
The year-on-year inflation rate, as measured by the Consumer Price Index (CPI), stood at 12.1 per cent in June 2017, down by 0.5 percentage points from the 12.6 per cent recorded in May 2017. This rate of inflation for June is the percentage change in the CPI over the 12-month period from June 2016 to June 2017.
Again, the Treasury bill rate has consistently dropped from the beginning of the year as a result of a reduction in the government’s appetite for domestic borrowing. The 91-day Treasury bill rate used by the banks to determine their lending rates also eased by 417 basis points from January to 12.6 per cent on July 21.
From the beginning of the year to June 2017, the cedi recorded a depreciation of 3.7 per cent against the US dollar, compared with a depreciation of 3.3 per cent reported in June 2016.
Under normal circumstances, the universal banks are supposed to react to these favourable macroeconomic indicators to drop their interest rates to bring some relief to their customers.
But the Managing Director of Universal Merchant Bank (UMB), Mr John Awuah and the Managing Director of the Access Bank Ghana,Mr Dolapo Ogundimu were reacting to questions about the impact of the 150 basis point reduction in the policy rate as announced last Tuesday at separate interactions in Accra last Wednesday.
In an interview with the Graphic Business on the issue, Mr Awuah said, “we are happy as banks to have interest rates reduced because it has a positive impact on bad loans”.
However, he said most of the banks had funds from other sources such as fixed deposits which interests are determined and locked per annum and that could not be varied because “there is a drop in the policy rate”.
“A customer comes to lock funds in fixed deposits with my bank as an example and the interest paid is fixed for a term; until that term expires and we pay the interest, we cannot vary what we agreed to pay him because the policy rate has reduced”, he explained.
“Mind you, it is the same money we take that we lend so if the interest on the fixed loan is high, lending it will also be plus a margin”, he added.
Mr Awuah agreed fully with the Governor of the Bank of Ghana, Dr Ernest Addison, who upon announcing the policy rate which now stands at 21 per cent indicated that the universal banks would react to the drop in the policy rate in due course but not immediate because of the various dynamics that come to play.
Meanwhile, Mr Awuah said the signal, including the stable currency, declining inflation and a drop in treasury bill rates were all positive indicators and asked for measures that would consistently keep the macroeconomy at appreciable levels to enable the banks to respond accordingly.
“We will definitely do something about it, that we can assure our customers when the times comes”, he said.
In a related development, Mr Ogundimu asked customers of the various banks in the country not to expect an immediate reduction in lending rates following the reduction of the Bank of Ghana’s policy rate.
He said although the reduction in the policy rate was a step in the right direction, it would be wrong for customers to assume that the rates would drop immediately because there were lots of factors involved in determining the lending rates.
The managing director said this when the bank took its turn on the Ghana Stock Exchange’s ‘Facts behind the figures’ session in Accra last Tuesday.
Mr Ogundimu, however, said it would take time before customers would feel the impact of this reduction because some of the banks already had contracts with depositors, with respect to the monies they gave out as credit.
“We have to support what the government is doing by also reducing our rate but the reality is that borrowers should not expect the rate to drop immediately the government makes that announcement because there are a lot of things that go into it,” he noted.
“Rates are expected to come down and we, the banks, expect it to come down too so we can lend more to the private sector but this will depend on the contracts that banks have with various depositors. If these contract end, then we will begin to renew them at the new rate which will be lower. It is only when this happen that we will transfer it to the borrowers,” he added.
Lack of liquidity
The MD also pointed out that another problem that might hinder the reduction of the lending rates was the liquidity challenge in the banking sector which had been compounded by the rising non-performing loans (NPLs) ratio and the rising cost of doing business.
“There is still a lot of outstanding energy sector debt and this is also affecting liquidity in the market,” he said.
“It’s a market of demand and supply so if there is enough money in the economy, definitely there will be enough savings and the rates will drop but if there is scarcity of money, it means you would have to pay a premium to get access to credit,” he added.
Access banks’ half year results
The bank recorded a profit after tax of GH¢28.2 million in the first half of 2017, down from the GH¢39.5 million it posted in 2016 first half, representing a decrease of 29 per cent.
Its deposits ,however, increased from GH¢2 billion in first half of 2016 to GH¢2.1 billion in first half this year, representing an increase of four per cent.
The increase in deposits contributed to a growth of the bank’s total Assets which increased from GH¢2.68 billion in first half of 2016 to GH¢2.82 billion in first half 2017, representing a growth of five per cent.
The bank’s NPL ratio which closed 2016 at 25.7 per cent also reduced to 20 per cent by the first half of 2017.
Mr Ogundimu attributed this decline to its restructuring and remedial actions which had started yielding significant results.
He said the bank was projecting this figure would decline further to 15 per cent by end of 2017.
He noted that its liquidity ratio in the last three periods had also showed a consistent improvement from 42.2 per cent in December 2016 to 42.4 per cent as at June, 2017.
Capital adequacy ratio also declined marginally by 0.5 per cent from 11.3 per cent in December 2016 to 10.8 per cent in June 2017 which was slightly above the regulatory limit of 10 per cent.
The MD said the bank was putting in place measures to ensure that it arrived at a very comfortable capital adequacy ratio.
“This is one of the reasons why we did the Initial Public Offer (IPO) last year. Out of that process, we succeeded in getting GH¢29 million and still have about GH¢100 million that will be coming in any moment from commitments during the IPO. Those who made the commitments have been engaged and they have given indication that they will bring the money soon,” he said.
“Our group office in Nigeria has also decided to give us equity capital of US$20 million and I believe if all these money come in, we should be closing the year with a capital adequacy ratio around 17 per cent,” he added.