Soaring NPLs threaten banking sector — Up 4.3% YoY to 24.3%

Despite major improvements in the banking sector, high Non-Performing Loans (NPLs) ratio continues to threaten its outlook.

Cumulatively, the sector recorded a 24.3 per cent in NPLs in August of this year, up from the 20.0 per cent it recorded in the same period of 2023. 

This means that, almost a quarter of loans given by banks to their customers go bad.

For instance, out of every GH¢1,000 released by the banks as loans, about GH¢250 is declared as non-performing.

The development reflects an increased default from large borrowers and indicates that elevated credit risk remains the primary concern for the sector’s outlook according to the September Monetary Policy Committee (MPC) report of the Bank of Ghana (BoG).

Major causes

Some players within the business community have attributed the phenomenon to the present economic conditions including high inflation, an unstable currency, high utility bills and what they also described as “overburdening taxes on imports and their operations, among other things.

According to them, much as it is their intention to honour their obligations by servicing the loans they take from the banks, their profits and sometimes, capital, is heavily eroded by the uncertainties and the high cost of doing business in the country.

“We are not happy when we default on our loans but it is obviously not our fault,” a road contractor told the Graphic Business on grounds of anonymity.

He said for instance that; “imagine taking a loan for a government project only to be paid in trickles over a period of five years. Meanwhile, the loan was for just two years. In the end, there is nothing left to service the loans”

Another businessman, a large scale supplier, also mentioned a similar concern and noted that “we take loans to import. The imports are slapped with heavy taxes which changes every day depending on the depreciating currency.

We supply to our customers and the stock stays in their facilities for months with no buyers. By the time we recoup part of the money, it has devalued and our profit from which we can service our loans is gone,” she said. 

They, among many others who expressed similar sentiments called for drastic measures to turn around the economic fortunes to enable businesses thrive and also save the banking sector and help businesses to grow, create jobs and help spur economic growth.

Impressive performance

Meanwhile, the banking sector’s performance continued to improve in the period under review.

For instance, assets grew at 38.7 per cent at end-August 2024, compared to 19.6 per cent in August 2023. 

In terms of profitability, both pre-tax and after-tax profits were higher in the first eight months of the year relative to the same period last year. 

On solvency, the Capital Adequacy Ratio (CAR) of the industry stood at 10.3 per cent in August 2024, higher than the 7.5 per cent recorded in the same period last year. 

“With reliefs, CAR was 13.8 per cent in August 2024, compared to 14.2 per cent in August 2023. Liquidity and efficiency ratios also improved during the first eight months of the year, highlighting that broadly, key financial soundness indicators are improving in the banking sector and remaining positive.”

Other developments

Against the odds as far as NPLs are concerned, private sector credit continued to grow during the review period to 21.7 per cent in August 2024, from just 10.7 per cent in August 2023. 

In real terms, the report said private sector credit recorded a growth of 1.1 per cent, relative to a 21.0 per cent contraction last year.

Money market

On the money market developments, the report revealed that on year-on-year basis, money market interest rates broadly trended downwards. 

For instance, the 91-day and 182-day Treasury bill rates declined to 24.85 per cent and 26.76 per cent respectively, in August, from 26.35 per cent and 27.84 per cent respectively, in the corresponding period of 2023.

Similarly, the rate on the 364-day instrument declined to 27.90 per cent in August 2024 from 30.88 per cent in August 2023. 

On the other hand, the weighted average lending rate on the interbank market increased. 

The rate, according to the report, increased to 28.84 per cent in the period under review from 26.59 per cent in August 2023. 

The average lending rates of banks to households and firms over the period declined marginally to 30.79 per cent in August 2024 from 31.78 per cent in August 2023.