While the Bank of Ghana contemplates reviewing the Cash Reserve Ratio (CRR), Banking Consultant Dr Richmond Atuahene has cautioned that the sector faces more fundamental challenges that require urgent attention.
He said while addressing the CRR was good, there are more critical issues plaguing the industry that need to be resolved.
In an interview with the Graphic Business, Dr Atuahene said the mounting Non-Performing Loans (NPLs) poses a significant threat to the stability of the banking sector.
Ghana’s banking sector is masking a dangerous reality beneath its seemingly impressive growth numbers, with nearly a quarter of loans given to customers classified as non-performing.
The sector’s NPL ratio has surged to an alarming 22.7% as of October 2024, up significantly from 18.3% a year ago, signalling a rapidly deteriorating loan book quality that could threaten the sector’s stability.
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Dr Atuahene argued that this situation had been exacerbated by the government's substantial indebtedness in the energy sector and its outstanding payments to road contractors, creating a ripple effect throughout the financial system.
"The focus on CRR adjustment, while important, risks diverting attention from more pressing concerns that could potentially destabilise our banking sector," Dr Atuahene stated.
Delayed payments
He pointed out that the government's delayed payments to contractors have created a chain of defaults that ultimately impact banks' loan portfolios.
The energy sector debt, in particular, has emerged as a critical concern for the banking industry. Several power producers and energy sector companies have struggled to service their loans due to delayed government payments, contributing significantly to the banking sector's NPL challenges.
The banking expert warned that without addressing these fundamental issues, any adjustments to the CRR might only provide temporary relief, while leaving the sector vulnerable to deeper structural problems.
He emphasized the need for a comprehensive approach to resolving these challenges.
"We need to look at the broader picture. The government must develop a concrete plan to clear its outstanding debts in both the energy and construction sectors. This would have a more significant positive impact on the banking sector than merely adjusting the CRR," Dr Atuahene explained.
The situation has become particularly concerning as banks struggle to maintain healthy loan portfolios, while managing their regulatory requirements.
Challenging environment
Dr Atuahene suggested that the combination of high NPLs and stringent reserve requirements had created a challenging operating environment for banks.
He urged the BoG to collaborate with the Ministries of Finance and Energy, together with the banks to develop a comprehensive solution to these challenges.
He said this collaboration should focus on creating a sustainable payment plan for government debts, while implementing measures to reduce NPLs.
"While we welcome the central bank's willingness to review the CRR, we must not lose sight of these other critical issues that require immediate attention," Dr Atuahene said.
He urged policymakers to take a holistic approach to addressing the banking sector's challenges, emphasizing that the sector's long-term stability depends on resolving these fundamental issues rather than focusing solely on regulatory adjustments.
Review of CRR
Bank of Ghana Governor, Dr Johnson Asiama, during a meeting with banks, announced plans to review the Cash Reserve Ratio (CRR) requirements for commercial banks.
He acknowledged the banking sector's concerns regarding the current CRR framework, stating that “we recognise the impact of the Cash Reserve Ratio for commercial banks and intend to review it critically".
However, he stressed that any modifications would need to be implemented gradually to maintain economic stability.
The BoG introduced a new tiered CRR system that ties reserve requirements to banks' loans-to-deposit ratios (LDRs).
Under the current framework, banks with LDRs below 40% must maintain a 25% reserve ratio, while those with LDRs between 40% and 55% face a 20% requirement. Institutions with LDRs exceeding 55% are subject to a 15% ratio.
The central bank introduced these measures as part of its strategy to manage excess liquidity in the banking system.
However, commercial banks have expressed concerns that the current requirements are constraining their ability to extend credit and are driving up operational costs.