The slow-motion killer in the banking system

There are growing concerns that the rising non-performing loans (NPLs) on the books of some banks in Ghana threaten their existence and depositor’s funds. There is the need for immediate enhanced ways of dealing with these bad loans on the financial strength of the banks to avert their collapse.

The latest Bank of Ghana (BoG) financial stability report revealed that the NPLs have hit GH¢6.1 billion over the last year, representing a 70 per cent increase of the 2015 figure of GH¢3.6 billion.

This is a worrying development that needs immediate attention to protect the integrity and dignity of our banking system. This write-up will recommend some of the best ways to deal with this issue.

As most economy watchers would agree with me, ‘An economy cannot grow without a healthy financial system and a financial system cannot get healthy in a weak economy.’ (JJ Afolabi)
It is then the responsibility of the managers and stakeholders of the economy to ensure that strategic growth policies are implemented for a sound healthy economy to boost private sector development and to guarantee secured efficient public sector growth for the banks to thrive.

The Ghanaian economy does not need weak fragile banks with limited financial capacity but rather a healthy strong few with huge capital base for big ticket transactions which will be able to grant long to medium-term loans to both local and multinational companies in the country. The central bank should be more interested and concerned about the safety, dignity, confidentiality and integrity of the financial system more than just issuing licences to weak financial institutions with small capital capacity to flourish and boost growth in the economy.

Causes of problem loans

First is the inappropriate lending practice at the beginning stage of the loan, i.e. from the application form filling, the requirements, the appraisals process and approval to the disbursement of the loan. Influence from board members, political figures, friends and crones of chief executive officers (CEOs) affects /influences the governance process of credit. Furthermore, breakdown in the control environment, deficiencies in managerial and operational processes of credit delivery are other contributing factors of non-performing loans.

Also, internal managerial deficiencies of the borrower are key when it comes to repayment of the loan, i.e. deterioration in products and services, loss of market share and sometimes insufficient collateral to support the loan.

A potential change in economic conditions in the country is another key contributor to the rising NPLs since it may affect negatively the repayment of the loan/facility. The unstable interest rate, constant appreciation of the major trading currencies against the cedi and the high inflation rate are some critical factors that cause NPLs, affecting the operational efficiency of the borrower’s business, ability to repay loans and consequently affecting the liquidity, profitability and solvency of banks as is the case currently in Ghana. Last but not least, NPLs also make cost of loans expensive.

Recommendations

1. The central bank urgently needs to review all its supervision and regulation procedures of the lending activities of all the universal banks in the country to ensure that credit delivery processes and best corporate governance practices are followed to mitigate the upward rise in NPLs.

2. Banks should be more concerned about the risk aspects of the loan process and the borrower’s capacity to manage/deal with business downturns rather than the surge in their loan books or the profit associated with the loans. Most credit policies used by banks focus so much on the historic financial data of the borrower’s business during the appraisal and not the external economic factors that can affect the business growth, i.e. volatile interest rate, depreciation of local currency, loss of market share, deterioration of customer’s product and ‘Act of God’. Knowledgeable and skilled individuals with analytical and critical review capacity must be hired as part of the credit team.

3. Most importantly, to have a drastic reduction in the NPLs in the banking system, there must be collaborative work among the major stakeholders in our country to ensure full realisation of this objective.

A holistic and robust legislative reform strategy must be implemented, aiming at having a vibrant, healthier and a sound banking & financial system. This, I must say, is long overdue, yet given the constant year-on-year struggle with the surge in NPLs which is affecting the service delivery and profitability of most banks in Ghana, little has being done.

The government and BoG must collectively work to strengthen the economic environment and the major indicators that drive business growth in our country. In this regard, it is easier for both local and international companies to sustain and improve their cash flows, borrow for long term and expand their business which will positively impact the economic/business activities in the country.

Conclusion

It should be noted that the continuous surge in NPLs is a worrying concern and impacts negatively on the credibility and integrity of the banking system. Urgent measures must be implemented to avert any collapse of a bank. NPLs create a vicious effect on the security of depositor’s funds which impact negatively on the business of the banks. BoG must collaborate with the universal banks to manage their NPL portfolios. I am very confident that should BoG heed these recommendations and partner with the stakeholders, the banking system will experience an unprecedented reduction in the NPLs on the books of banks.