Weak banks require urgent recapitalisation
The International Monetary Fund (IMF) has asked the Bank of Ghana (BoG) to ensure that banks with minimum capitals below the industry requirement prepare “credible and time-bound recapitalisation plans” that will serve as blueprints to the strict rebasement of their capital reserves.
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The plans should be in line with the timetable specified in the Banks and Specialised Deposits Taking Institutions (SDI) Act, the fund said, explaining that failure to recapitalise the less liquid banks on time could “adversely affect credit and the real economy.”
The warning was contained in the fund’s Staff Concluding Statement after the 2017 Article IV Consultation Mission and discussions for the fourth review under the country’s Extended Credit Facility (ECF) issued on April 13.
It was informed by last year’s asset quality review (AQR) of banks by the BoG, which indicated that the minimum capitals and provisioning for future liabilities by some banks fell below the industry’s requirement.
Given the implications on the entire financial sector and the real economy, the IMF said the central bank needed to take action on the issue now.
“Inaction would adversely impact on credit and the real economy, financial deepening, and ultimately lead to quasi-fiscal costs to the BoG; it would also create moral hazard, undermining banks’ discipline,” the fund said in its statement.
Beyond that, the fund said “the emergency liquidity assistance (ELA) guidelines should be strictly enforced, including requiring that banks provided collateral and implemented repayments plans; large exposures should be aligned with regulatory limits.”
Magnitude of the problem
Although worrying, the concern of the fund on the liquidity of some banks is not entirely new, given the challenges that confronted the banks recently.
As of December last year, data from the BoG showed that 17.4 per cent of total loans and deposits during the period were non-performing, which means that out of the GH₵35.5 billion loans and advances disbursed last year, some GH₵16.17 billion were in default or close to default.
Of the amount classified as NPLs, about 8. 4 per cent, representing GH₵518.9 million, had been placed on the loss category – a special reference to delinquent loans that banks consider almost impossible to recover.
Given that delinquent loans are normally deducted from a bank’s capital, a former Deputy Governor of the BoG, Mr Emmanuel Asiedu-Mante, explained that this high default rate in the industry usually put a lot of stress on the capital of the affected banks.
“If a borrower cannot pay back the money taken, the capital, which acts as a reserve, takes that shock,” he said added that the situation could have accounted for the inability of some of the banks to meet the minimum capital requirement of the BoG.
Implications on economy
While explaining that it is not entirely suicidal for banks to operate with minimum capitals below the industry’s requirement, an Economist and a Senior Research Fellow at the Institute for Fiscal Studies (IFS), Dr Said Boakye, noted that the situation posited by the IMF could mean that the issue was becoming widespread.
“If it is one or two banks, that is fine but if a lot of banks are affected by inadequate capital, then there could be a problem,” he said.
He added that inadequate capital in functional banks could increase the risks of bank run, which occurs when a bank is unable to meet the liquidity needs of customers.
“If banks are adequately resourced, it means the risk of bank run becomes limited,” he explained.
The situation could pose a challenge to depositors’ funds, as well as result in loss of confidence in the banking sector, which can feed into the economy, leading to fully blown challenges.
As a result, Dr Boakye and Mr Asiedu-Mante said the BoG needed to ensure that all affected banks were made to meet the required capital adequacy ratios mandatory for all banks.
“The BoG is the regulator and they have various policy options on how to get banks with inadequate capital to recapitalise,” Dr Said stated.
“Initially, it could be a warning, and if they are not picking up, they can give them some time and ensure that they follow it. The final one is the punitive options,” he said.