Over exposure to DDEP not our making: Loans, advances converted to bonds — Banks
Banks have explained that what seemed to be an overexposure of the industry to government securities was actually the result of reclassification of some loans and advances to bonds.
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For instance, they indicated that some loans and advances to some players in the energy sector and GETFUND contractors were converted into bonds.
Responding to public backlash over the overexposure to government securities, they also revealed that there were some bilateral government loans which were programmed to be settled with bonds instead of cash.
The banks also explained that in 2018, a new bank, Consolidated Bank Ghana (CBG) was set up and capitalised almost entirely with government bonds, thereby distorting the loan to deposit ratio of the banking industry and further increasing the industry’s holdings in government securities.
Banks in the country came under severe scrutiny due to what many described as their overexposure to government bonds during the Domestic Debt Exchange Programme (DDEP) which did not only distort the markets, but severely affected investments of both individuals and businesses.
Their activity on the bond market was described by some experts as a clear case of poor risk management practices and a breach of the Banks and Specialised Deposit-Taking Act (Act 930).
While the Banks and Specialised Deposit-Taking Act (BSDI) places a 25 per cent limit on banks financial exposure to a single individual or entity, some banks had between 30 to 50 per cent of their net funds in government securities.
In the end, the banks’ exposure to government bonds led to significant losses after the DDEP programme which saw the government swap old bonds for new ones at reduced coupon rates and longer tenors.
Audited 2022 accounts of the banks showed that 16 out of the 23 banks operating in the country recorded severe losses, with five of them recording decreased profits. An analysis by the BoG indicated that the banks recorded losses totaling GH¢7.4 billion in the year under review.
Reason for overexposure
Speaking at the Quarterly Banking Roundtable organised by the University of Professional Studies Accra (UPSA) Law School, the Chief Executive Officer of the Ghana Association of Banks, John Awuah, said the banks did not deliberately set out to unduly over expose the industry to government bonds.
He said there were some intervening events that resulted in the size of the exposure that was witnessed during the implementation of the DDEP.
“A critical look at the preposition of the bonds indicates that some of the bond exposures captured under the DDEP were actually loans and advances which subsequently metamorphosed into bonds.
“Included in the bond portfolio under the DDEP is the ESLA bonds which originated from loans extended by the banks to the energy sector and in particular, the Volta River Authority (VRA) and loans to BDCs to fund losses that accrue due to the forex under recovery during the years where petroleum prices were not deregulated.
“So due to VRA and the BDCs inability to repay their loans, an arrangement was reached between the banking community and the government to set up a special purpose vehicle called ESLA PLC which issued bonds to the banks to be repaid from the ESLA levy in the petroleum price build up,” he stated.
He said this resulted in the reclassification of these loans and advances to bonds.
Dakye bonds
Mr Awuah said another major item in the preposition of the bond portfolio was the Dakye bonds which were also loans provided to contractors of the Ghana Education Trust Fund (GETFUND) who were not being paid by the fund.
He said in response, the government set up the Dakye Trust PLC which then issued bonds to the banks that had provided the funding to the contractors to settle the loans to enable the fund to embark on new investments in educational infrastructure in the country.
He noted that these outstanding loans were also reclassified as bonds.
“There are also other bilateral government loans which were also settled with bonds instead of and finally, we should not lose sight of the fact that, in 2018, a new bank, Consolidated Bank Ghana (CBG) was set up and capitalised almost entirely with government bonds, thereby distorting the loan to deposit ratio of the banking industry and further increasing the industry’s holdings in government securities,” he added.
Mr Awuah said these were the circumstances and events that led to the industry’s over exposure to government bonds.
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Difficult decision
Mr Awuah said in the heat of the DDEP discussions, banks took the very difficult decision of focusing on how as a banking community, they can contribute and be part of the solution to the economic distress that was staring at the country.
He said while the industry was not asking for an applause for the decision to participate in the DDEP, it would like the public to understand the crucial role that banks played in arriving at an IMF programme for the country.
“The cost of that decision to the banking industry was a GH¢19.2 billion in new impairment on financial instrument, specifically government bonds and a loss GH¢7.4 billion in 2022.
“This resulted in a significant drop in the capital levels of banks. The DDEP introduced a lot of risk factors unto the balance sheets of banks but there was a bigger call which was a call to national duty and as an industry we looked at what we can do to support the economic growth and stability of the country,” he stated.
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