Loan under-recoveries plaguing financial stability

The rise in loan under-recoveries, a development that threatens financial stability and credit availability, is being strenuously tackled by the Bank of Ghana (BoG).

Indeed, ongoing collaboration with key stakeholders, including commercial banks, non-bank financial institutions and regulatory bodies, to develop effective strategies that mitigate the impact of rising non-performing loans (NPLs) is being pursued.

Second Deputy Governor-Bank of Ghana Elsie Addo Awadzi has noted that despite the Borrowers and Lenders Act of 2020’s existence to effectively enforce collateral requirements, there are still attendant inefficiencies.

Consequently, Madam Awadzi has challenged players to apply stricter collateral enforcement among borrowers to ensure resilient and sustainable lending practices. The Bank of Ghana has, over the past two decades, implemented regulatory reforms aimed at modernising the credit market.

These include the Credit Reporting Act of 2007 and the Borrowers and Lenders Act of 2008, which introduced frameworks for credit information sharing and streamlined the collateral enforcement process.

Data from the collateral registry indicate that from 2010 to the end of 2023, a total of 4,640 such certificates were issued to facilitate loan recovery efforts. However, anecdotal evidence suggests that many of these cases still end up in court, delaying the recovery process.

The Bank of Ghana recently conducted a survey to assess current challenges faced by banks in utilising provisions of the Borrowers and Lenders Act.

The NPL ratio increased from 18 percent in September 2023 to 22.8 percent by September 2024. The escalation in NPLs has led banks to write off bad loans totalling GH¢163.5million over the past year, impacting their balance sheets significantly.

The cost of non-payment is ultimately borne by depositors, whose funds are used to provide these loans.

The growing burden of bad loans has made financial institutions more hesitant to lend – especially to genuine businesses, which could stifle economic growth.

Chief Justice Gertrude Torkornoo, who also spoke at the forum, shared her perspectives on the legal challenges associated with debt recovery.

She acknowledged the efforts made through enacting various laws – including the Borrowers and Lenders Act of 2008, its 2020 amendment and the establishment of the collateral registry.

Despite these interventions, she pointed out that the judicial process continues to face hurdles in resolving debt-recovery cases efficiently.