Bankers agonise over abuse of financial contracts

Lack of respect for financial contracts, in the private sector, and particularly by government, is very detrimental to the banking sector, and the earlier it is stopped the better it would be for the Ghanaian economy, President of the Association of Bankers, Alhassan Andani, has said.

Banks in the country cannot meet the globally acceptable 5percent and below Non-Performing Loans (NPLs) ratios if payments keep delaying beyond reasonable time limits, he said.

Alhassan Andani, who is the MD of Stanbic Bank, told the B&FT that with stipulated banking guidelines, including the latest International Financial Reporting Standards (IFRS) which comes into effect on January 1, 2018, financial institutions do not have the luxury of waiting on clients who delay in payments.

“We provide, as banks, lines of credit, to government and private sector entities and there seems to be no strong respect for financial contracts in the market.The average life of payment for government related goods and services, from our findings, is about 18 months and that is not very good for liquidity and risk management,” he said.

“The lack of respect for contracts runs through, whether its parastatal, direct government, private individuals. You contract bank loans with a definite repayment schedule and time and these are just flouted and you try to unravel it in the courts and it takes forever; that’s not good for the financial services sector’s development,” he said.

The latest global reporting standards(IFRS 9)issued by the International Accounting Standards Board, an independent, private-sector body that develops and approves international financial reporting standards, stipulates that when a credit facility is not paid after three months or 90 days, it must be declared as impaired and provisioned for.

Even though the IFRS 9 guidelines allow that once the credit facility is secured or fully backed by a collateral, the loan should not be classified as impaired, the Bank of Ghana specifically states that, even if it is backed by security, once it is in default for three months, provision must be made for the loan because it is difficult disposing off securities to defray loans in Ghana.

This directive, according to analysts, therefore, means that if a loan is in default for three months, backed by security or not, provision must be made, which is one of the reasons non-performing loans have spiked in the banking industry over the past two years, which led to the collapse of UT Bank and Capital Bank, the banks recently taken over by GCB Bank.

Although in Ghana, the Borrowers and Lender Act 2008, Act 773, which is under review, allows banks and other financial institutions to takeover collateral used in securitising loans without going through the rigours of court, several loopholes have seen debtors’ slow banks down in taking over properties or securities.

Contractors in the country have always decried government’s delay in paying them, with some payments delaying for as long as six years, which erodes their credit worthiness to the banks.

Government, in its 2017 mid-year budget review, indicated that it would need up to 2019 to clear all arrears owned contractors.

Rockson Dogbegah, the Construction Sector Chairman of the Association of Ghana Industries, said recently that legislation may be needed to force government to pay up on time.

This year alone, government has had to pay some GH¢600million in arrears to contractors, but the NPLs ratio in the banking sector has seen a year-on-year rise for the past three years.

The latest BoG Banking Industry Report, June 2017, pointed to a deterioration in the loan portfolio of banks between June 2016 and June 2017, although the rate of increase (year-on-year) in the industry’s NPLs slowed down from 82.5 percent in June 2016 to 30.7 percent in June 2017.

The report stated that by the end of June 2017, the stock of NPLs in the banking industry had risen to GH¢7.96 billion, from GH¢6.09 billion in June 2016. This translated into an NPL ratio of 21.2 percent in June 2017 compared with 18.8 percent in June 2016.

With the private sector being the largest recipient of outstanding credit balances, it accounted for the greater proportion of NPLs.

The sector’s total NPLs increased from 87.3percent in June 2016 to 94.9percent in June 2017, whilst the proportion of NPLs attributable to the public sector declined from 12.7percent to 5.1percent over the same period due to the restructuring of the TOR and VRA debts.

“Most private sector NPLs were debts of indigenous enterprises accounting for 77.2percent of total NPLs in June 2017, from 73percent in June 2016.

The three largest sectors in terms of outstanding credit balances, namely, the Commerce & Finance, the Services and the Electricity, Gas & Water sectors, accounted for 63.6percent of total NPLs in June 2017, compared with a share of 65.7percent in June 2016,” the report added.

Mr. Andani is of the view that, everywhere in the world, NPLs probably hover around 2-3percent, and, therefore, Ghana’s situation is not right.

“Even though the NPL issue is a bank specific issue to manage, it is actually a broader economic issue because it means these set of assets that you have becomes solidified and that money is not available for other people to use and make banks less agile.

If people understand that the law and the country generally frowns on people flouting loan agreements and arrangements made with lenders and act appropriately, that will improve the environment tremendously,” he noted.