Banks solvency under threat — High NPLs to blame
The high non-performing loans (NPLs) ratio in the country is a major threat to the profitability and solvency of banks, Banking Consultant, Dr Richmond Atuahene, has cautioned.
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He said although the banking industry has been battling with rising NPLs for decades now, the level at which it is rising now threatens the financial stability agenda of the country.
In an interview with the Graphic Business, Dr Atuahene advised the government, the Bank of Ghana and the banks to put in place measures to immediately address the rising NPLs in the country.
Ghana has historically recorded high levels of NPLs in the banking sector, with NPLs reaching a record high of 24 per cent in 2023.
According to Demirguc-Kunt and Detragiache (1997), any banking industry whose NPLs exceed 10 per cent is in crisis.
Dr Atuahene said the country’s banking sector was therefore in a full-fledged crisis as a result of general repayment challenges on the part of borrowers.
He said the repayment challenges were a reflection of the weak macro-economic imbalances in the form of higher inflation, higher lending rates, persistent depreciation of the local currency, higher energy cost and harsh business environment.
He noted that data reviewed on the non-performing loans in the banking sector from 2014 - 2023 indicated a rising trend over the period.
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Banks in the country had a difficult 2022 due to the Domestic Debt Exchange Programme, with 16 banks recording significant losses in the year under review.
The banks, however, rebounded in 2023, with results from 20 out of the 23 banks indicating a return to profitability.
Although four banks still recorded losses in 2023, the losses recorded were an improvement of the 2022 losses.
A Graphic Business analysis of the results indicated that total profit for the year under review increased to GH¢9.5 billion, up from the GH¢424.88 million recorded in 2022.
Dr Atuahene said the high NPLs could, however, erode the profitability of the sector if not addressed immediately.
“Non-performing loans (NPLs) erode the profitability and can threaten the solvency of banks, and when a sufficiently large volume of loans is affected, they can potentially threaten financial sector stability,” he said.
Fiscal weaknesses
To reverse the NPLs trend in the country, Dr Atuahene urged the government to address the persistent fiscal weaknesses that have created vulnerabilities in the banking sector.
He said the government’s dominance in economic activity, against the backdrop of weaknesses in fiscal management, further increased vulnerabilities in the banking sector.
He pointed out that the government’s accumulation of payment arrears to contractors and other service providers which has undermined their capacity to service their bank loans and created NPLs across the industry had prevailed on the past decade.
He said the accumulation of new government arrears could compound the NPL problem and weaken banks.
“In addition, while government domestic arrears have been a recurring source of vulnerability, banks continued to rely on implicit government guarantees when lending to government service providers,” he stated.
He urged the government to settle its indebtedness to contractors to enable them to pay back their loans to the banks, adding that this would help the banks recover some of the NPLs on their books.
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Using NIB as an example, he said the bank would be liquid and would not even need government recapitalisation if the government settles its GH¢1.2 billion debt to contractors who owed the bank.
Governance structure
Dr Atuahene also advised Boards and Directors of banks to put in place an appropriate governance structure to address the rising NPLs.
He said without an appropriate governance structure and operational set up within the banks, they would not be able to address the persistent NPLs issues.
“In accordance with international best practices, the board of directors and management should approve and monitor the institutions’ NPLs strategy.”
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“For high NPL banks, the NPLs strategy and operational plan should form a vital part of the overarching strategy and should therefore be approved and steered by the executive management and reported regularly to the board of directors,” he stated.
He said the board and directors must approve annually and regularly review the NPL strategy including the operational plan; oversee the implementation of the strategy; define management objectives (including a sufficient number of quantitative ones) and incentives for NPL workout activities; and periodically (at least quarterly) monitor progress made in comparison with the targets and milestones defined in the strategy.
Risk management framework
The Banking Expert also advised banks to implement a well-designed risk management framework that has been considered a must for a best-practising bank.
He said universal banks should be immediately required to strengthen their internal controls and risk management practices, including strengthening their credit risk assessment, legal perfection of collateral, monitoring and collection systems as well as debt collection.
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“To decide whether to approve a loan application, banks should evaluate the riskiness of the loan, decide an appropriate risk premium on the loan, devise measures to prevent as well as deal with possible loss events, and assess their ability to absorb losses when NPLs occur.”
“Putting such a framework into practice would be expected to increase operational efficiency. If the risk management framework does not work, a plan for the reduction of NPLs is necessary,” he said.