BoG warns banks about rising bad loans
The Bank of Ghana (BoG) has warned commercial banks to step up their loan recovery efforts and tighten credit risk management practice. The central bank has also cautioned banks to minimise their exposure to the energy sector in a bid to further improve the asset quality of the banking industry and reduce losses from non-performing loans.
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The Electricity Company of Ghana (ECG) and the Ghana Grid Company Limited (GRIDCo) owe the banking sector over GH¢1.2 billion, which the government and the companies have been struggling to pay.
The power companies further need an estimated US$1.18 billion in 2016 to purchase fuel for thermal plants to generate electricity, which the African Centre for Energy Policy (ACEP) has raised doubts about the ability of the power companies to secure.
The warning from the regulator is to stem the growing fear of the banking industry’s deteriorating asset quality, which has seen an almost 60 per cent increase in banks’ non-performance loans between March 2015 and March 2016.
This has pushed the average lending rate to increase to 32.1 per cent as of April 2016, from 25.4 per cent at the start of 2014.
At end March 2016, net loans and advances of GH¢26.77 billion represented an annual growth of 7.8 per cent compared with the 41.2 per cent growth in the corresponding period last year.
Banks’ investment portfolio (bills and securities) also increased, in year-on-year terms, by 27.4 per cent to reach GH¢15.18 billion by the end of March 2016 compared with the 6.2 per cent growth a year ago.
Implications on profitability
The warning was contained in Bank of Ghana’s Financial Stability report for May 2016, which forecasts that while a slowdown in credit delivery will moderate the accumulation of NPLs, it has adverse implications on profitability, since credit delivery is the core business of banks.
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The slower growth in total assets also reflected in its components, with banks generally cutting back on credit.
Domestic assets slowed down by 19 per cent year-on-year growth to GH¢59.39 billion at the end of March 2016 compared with the 35.6 per cent growth recorded for the same period in 2015.
Moody’s raises concern
Already, credit rating agency, Moody's, has warned that the fortunes of Ghanaian banks could further decline on the back of increasing non-performing loans, which have already reached a 6-year high.
According to Moody's, the aggressive loan expansion drive undertaken by banks in recent times has put them in a situation in which the current “deteriorating operating environment and rising interest rates” could create further vulnerabilities for the sector.
“Ghanaian banks have enjoyed strong loan growth in the past few years, with loans and advances growing 41.5 per cent in 2014 for example. Although loan growth declined to 24.9 per cent in 2015, recent high growth has created a large stock of unseasoned loans; and we believe these loans create vulnerabilities given Ghana's deteriorating operating environment and rising interest rates,” the rating agency said.
“The rising non-performing loan (NPL) ratio is credit negative for Ghanaian banks, because as they require higher loan-loss provisions for the NPLs, it lowers profitability and impairs banks' internal capital generation. We believe that NPL ratios will continue climbing as a result of aggressive loan growth in recent years,” Moody's warned.
growing fear of the banking industry’s deteriorating asset quality, which has seen an almost 60 per cent increase in banks’ non-performance loans between March 2015 and March 2016.
This has pushed the average lending rate to increase to 32.1 per cent as of April 2016, from 25.4 per cent at the start of 2014.
At end March 2016, net loans and advances of GH¢26.77 billion represented an annual growth of 7.8 per cent compared with the 41.2 per cent growth in the corresponding period last year.
Banks’ investment portfolio (bills and securities) also increased, in year-on-year terms, by 27.4 per cent to reach GH¢15.18 billion by the end of March 2016 compared with the 6.2 per cent growth a year ago.
Implications on profitability
The warning was contained in Bank of Ghana’s Financial Stability report for May 2016, which forecasts that while a slowdown in credit delivery will moderate the accumulation of NPLs, it has adverse implications on profitability, since credit delivery is the core business of banks.
The slower growth in total assets also reflected in its components, with banks generally cutting back on credit.
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Domestic assets slowed down by 19 per cent year-on-year growth to GH¢59.39 billion at the end of March 2016 compared with the 35.6 per cent growth recorded for the same period in 2015.
Moody’s raises concern
Already, credit rating agency, Moody's, has warned that the fortunes of Ghanaian banks could further decline on the back of increasing non-performing loans, which have already reached a six-year high.
According to Moody's, the aggressive loan expansion drive undertaken by banks in recent times has put them in a situation in which the current “deteriorating operating environment and rising interest rates” could create further vulnerabilities for the sector.
“Ghanaian banks have enjoyed strong loan growth in the past few years, with loans and advances growing 41.5 per cent in 2014 for example. Although loan growth declined to 24.9 per cent in 2015, recent high growth has created a large stock of unseasoned loans; and we believe these loans create vulnerabilities given Ghana's deteriorating operating environment and rising interest rates,” the rating agency said.
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“The rising non-performing loan (NPL) ratio is credit negative for Ghanaian banks, because as they require higher loan-loss provisions for the NPLs, it lowers profitability and impairs banks' internal capital generation. We believe that NPL ratios will continue climbing as a result of aggressive loan growth in recent years,” Moody's warned.