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We support BoG’s action on banks

BY: Graphic Business
We support BoG’s action on banks
We support BoG’s action on banks

The role of a resilient banking sector cannot be overemphasised in the quest to build a strong economy. As financial intermediaries, banks help to move funds from surplus areas to deficit ones.

They ensure that funds are directed to where they are really needed to take care of the financing needs of individuals, businesses and even the government.

However, there are some challenges that confront the banks, among which is the increased risk that high non-performing loans (NPLs) pose to the banks, the industry and the economy as a whole.

NPLs, which have been a bane of banks in recent times, constitute loans that are either in default or close to default. Here in Ghana, as is the case everywhere, the repayment of every loan that is 90 days or more overdue is classified as non performing.

The figure was 19 per cent in October 2016 but grew by 13.6 per cent within the 12-month period. This was after new NPLs, mostly from the private sector, added to the government’s indebtedness – the legacy debt – arising from the energy sector.

Although the NPLs ratio dropped to 17.7 per cent in February this year, the data showed that it afterwards remained above the 20 per cent threshold, with September’s close of 22.2 per cent being the highest.

As indicated in our front page lead story, the Bank of Ghana (BoG) has taken a serious view of the persisting high non-performing loans (NPLs) in the banking sector after recent efforts by the government, through the issuance of the energy bond, to address its indebtedness to the banks failed to yield the necessary results.

It has, therefore, directed each of the 32 banks to submit credible plans that they intend to use to address the high NPLs, which ended in October at 21.6 per cent – almost five times higher than the global standard of below five per cent.

The directive was issued on November 28 at a meeting between the central bank, led by the Governor, Dr Ernest Addison, and chief executives and other senior management of the various banks, a source told the GRAPHIC BUSINESS.

The banks are to respond with their written proposals before the end of this month, and the BoG is expected to vet the responses against the peculiarity of each bank’s predicament to be able to take a decision.

High NPLs have an adverse impact on the capital adequacy ratio (CAR) of banks, as those with NPLs are mandated by law to provision for them – set aside a portion of their capital to be used to pay off such debts.

In August this year, UT and Capital banks collapsed following a consistent deterioration in their CARs on the back of mounting NPLs.

The CAR has hovered between 17 and 14 per cent since January this year. It opened the year at 17.8 per cent but fell to 14.4 per cent in July. The BoG reported it at 15 per cent in October
We are very concerned because the situation has far-reaching consequences for the financial industry and the economy at large because of its spill-over effects.

The earlier we found a solution to this, the better it would be for the banking sector and the economy to take off smoothly. — GB

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