Tackling alarming NPLs in Ghana

BY: Maxwell Akalaare Adombila

The non-performing loan (NPL) ratio, a percentage of bad loans over total ones, has taken its firm rise to another level, hitting an all-time high in November last year.

Data from the Bank of Ghana (BoG) show that the ratio was 22.9 per cent in November 2017 but eased to 22.7 per cent in December that year.

At 22.9 per cent, the NPL ratio is now at a level never seen before; the current rate only rivals those last seen in 2002. At the time, the NPL ratio was reported to have risen from 12 per cent in 2000 to 19 per cent in 2002.

By way of interpretation, the November and December 2017 ratios mean that of every GH¢1 that was given out in loans, almost 30 pesewas was either in default or close to default IN those months.

It also means that of the GH¢37.7 billion that was disbursed by banks to borrowers last year, about GH¢8.6 billion had been classified as delinquent.

BoG’s categorisation

In Ghana, as is the case everywhere, the repayment of every loan that is 90 days or more overdue is classified as non-performing. Within the NPL bracket come various categories that are used by officers in the Banking Supervision Department of the BoG in their monitoring activities.

From the red flag category, which is the first in the categorisation, to loss category, this health grading system for loans is meant to give the regulator a clearer picture of the quality of assets in the banking sector for the purposes of policy initiation and implementation.

As of December last year, that system showed that almost half of the GH¢8.6 billion classified as NPLs were in the loss category and must, therefore, be provisioned for and subsequently written off.

What this meant was that 12 per cent, equivalent to GH¢4.5 billion, of loans granted as of December 2017, had been written off by the lender banks.

This is depressing, especially to the banks, whose profitability ratios have already suffered serious bruises.

Compared to the global standard of below five per cent for NPL ratio, one will not be wrong to say that Ghana’s NPL ratio is now at an alarming rate and require immediate, credible and sustaining measures to resolve, going forward.

With two banks – the UT and the Capital banks – already down due to illiquidity and deficiency in capital (the direct impact of NPLs), one need not belabour the point that the current rate is dire to the industry and addressing it must be done with alacrity.  

The cycle

For years, repayment of loans has remained a major hurdle for banks in the country. This is attributable to a combination of individual attitudes and systematic challenges in the economy.

In recent times, however, a critical analysis indicates that the NPLs conundrum is now being fed by a cycle of events and actors that trace themselves to one source – weak economic fundamentals.

The first cause is depressed private sector growth. When companies and individuals borrow funds to invest in their operations or start new ones, returns on those investments are eroded by the results of these systematic economic challenges that include rising inflation, currency depreciation, high fiscal deficits and ‘killer’ utility tariffs particlarly electricity.

With these bearish returns on investments, the borrowers are always handicapped in honouring scheduled repayment dates, leading to their facilities being classified as non-performing.

BoG data showed that about 94.7 per cent of NPLs originated from the private sector.

In the case of the public sector, the government’s attitude of not always paying back its loan on schedule has meant that facilities granted to the government and other state-owned enterprises will have to always be treated as NPLs until a repayment schedule is agreed upon. A case in point is the legacy debt in the energy sector, which is now being cleared through the issuance of bonds.       
 
The real challenge

In between these two broad causes is the real deal, which requires aggressive action from the government and the BoG to address if the NPL issue is to be addressed holistically.

Over the years, government projects have become the main source of growth for private enterprises. To execute these projects, businesses turn to the banks for loans.

Sadly, however, payment for work done on these projects has never been on time, resulting in the private sector also being unable to honour its loan obligations to the banks. The result is the bloat in the general NPL ratio and the private sector’s share in particular.

This explains why payment of contractors and other private enterprises that have successfully executed government contracts is critical to the success of the banking sector.

Impact of NPLs

Given that provisioning for bad loans and write-offs is done on the profits of banks, it suffices to say that the analysis above proves that about GH¢4.5 billion of the banking sector’s profits was written off last year due to the debilitating effect of NPLs. This is worrisome.

Beyond having a toll on banks’ profits and the level of reinvestment and remuneration for staff, this huge write-off limits the lending capacity of banks. It first contracts their lending ability in terms of real funds available in their loan books before weakening their individual confidence and appetite in granting loans.

It also undermines investor confidence in the sector, given that NPLs have a direct hit on the bottom lines of banks and shareholders’ funds.

All these lead to a moderation in private sector activity and that subsequently impacts negatively on economic growth. This explains why non-oil growth, the area that is mostly funded by loans, has witnessed sluggish growth over the past four years.

The solutions

In a country where cost of and access to credit continue to be the most dominant challenges facing businesses, this exponential rise in NPLs should be of concern to all well-meaning Ghanaians.

While it is true that addressing the high NPLs requires that all debtors pay their debts on time, it is also true that no right-thinking person or institution wants to owe beyond a certain threshhold. This brings in the issue of capacity to pay.

Although most debtors are willing to pay, challenges beyond them as enumerated above, have made it unsuccessful, hence the need for BoG to intervene and actively devise a workable solution to the problem.

As regulator of the financial sector, it is fair to say that the BoG currently has a fair idea of the true state and composition of NPLs in the banking sector. This is a necessary first step in addressing the challenge.

The others will be to plead with the government to fast-track its arrears clearance schedule to help create liquidity for creditor institutions to honour their loan obligations.

The BoG could also fashion out a workable strategy with the government to honour its debts to the private sector but in a manner that does not jeopardise the infant stability in the economy, which deserves further nurturing.

Also, the credit departments of banks will have to up their games by being more thorough in their assessment of customers and projects before and after granting loans. It is disappointing that in spite of the availability of services such as collateral registry and the credit referencing bureaus in the country, one customer is still able to owe more than one bank.

Banks need to know that the days of blaming their NPLs on lack of a proper identification system are fading. More so, the reality of a bad decision on lending – the collapse of the two banks in August 2017 – should override the eagerness to seal a deal and make profit, which has also led to exorbitant interest rates.

Whatever the case, the BoG needs to prioritise its action on the NPLs to help restore confidence, improve liquidity and prepare banks for the fresh capital that the recapitalisation will yield.