Banks cut credit lines as bad loans rise

Commercial banks in the country have begun to cut loans and advances to businesses and consumers in what is seen as a pre-emptive measure to contain losses as the quantum of Non Performing Loans (NPL) have suddenly taken a steady northerly turn in Ghana's banking industry.

According to the latest Bank of Ghana macroeconomic and financial data report released on Monday, banks in the country have within a month cut credit to customers from GH¢29.1billion in August to GH¢28.7billion at the end of September.

The reduction, albeit marginal, has coincided with a sudden rise in non-performing loans from 13 percent in August to 13.5 per cent in September -- the first time in more than 12 months that bad loans on the books of banks have seen such a quantum leap.

The cut in loan advances is thus considered as a further tightening of credit to customers, since a difficult business operating environment has caused many businesses and consumers to default on their loans.

Some analysts have opined that the recent increase in the Bank of Ghana policy rate by 100 basis points to 26 percent could further trigger an increase in the risk of banks incurring higher non-performing loans, due to the potential for default among borrowers exposed to a high interest rate regime.

The increasing risks in providing consumer and business loans have also pushed the banks to prioritise investments in Treasury bills and other securities over interest income.

Not too long ago, the Managing Director of Cal Bank, Frank Adu Jnr., defended banks trading in money market instruments and indicated that his bank will now concentrate on pushing up its investments in Treasury bills and other secure securities -- and cut its lending to consumers and businesses as long as interest paid on short-dated securities remains at or goes above the current 25 percent.

But the tough posture of the banks in advancing credit has left many private enterprise managers in uncertainty amidst increased demand for bank loans for inventories, working capital, and debt restructuring.

It is widely believed that the problem of obtaining bank loans has been aggravated by the erratic power supply, uncertainty in the cedi, which has impacted negatively on input costs and production output of smaller firms -- putting substantial pressure on profit margins.

Finance Minister Seth Terkper, in presenting the 2016 budget to parliament, assured the nation of additional measures to address the energy crisis in the country. But many businesses suggest the quality of loans provided by banks will deteriorate further with the hikes in interest rates and inflation, and general mismanagement of the economy.

According to a Bank of Ghana’s recent report, the firm stance taken by financial institutions regarding granting loans to large enterprises and consumers has been exacerbated by lower expectations of banks regarding the economic environment, reduced access to market finance, increased cost of funds, and balance sheet constraints.