Banks scare borrowers

• With stringent demands

Ghana has had its fair share of quandary that resulted from the global financial crisis, and the central bank reports banks still hold on to tight credit lines.

A second quarter survey conducted by the Bank of Ghana (BoG) on the conditions of credit shows that there is a general contraction in credit availability. The tightening of credit, according to the report, has been done through non-price terms and conditions such as shortening of the maturity of loans or credit lines, and the requirement of additional loan covenants and collaterals. The survey further indicates that there has been a significant decline in the net demand for credit by both households and enterprises Governor of the Bank of Ghana, Dr. Paul Acquah at a meeting with the press last week noted that distribution of the annual credit flow showed some shifts and reductions in certain key sectors. “In particular, the mortgage sub-sector, commerce and finance, transport and storage as well as services sectors witnessed significant reduction in credit allocation during the second quarter”, he said. ‘‘The share of the services sector which accounted for 35.9% at the end of December 2008, reduced to 24.8% in March 2009, and further to 18.4% in May 2009…whilst that of commerce and finance reduced from 20.2% in March 2009 to 16.5% in May 2009”. The share of manufacturing also dropped from 10.4% to 9.3%.

On the other hand, electricity, gas and water increased from 10.6% in March 2009 to 11.4% in May; and Agricultural from 5.1% in March 2009 to 6.6% in May.

The remaining sectors recorded varying levels of increases in the flow of credit to the private sector ranging between 1.7 and 5.1%.

Deposit money banks (DMBs) rates firmed-up in the second quarter of 2009. Average base rate quotations of the banks were revised upward by 160 basis points in the second quarter in the range of 25.75% to 32.0%.

The Annual Percentage Rates (APR)s of banks which is the true interest rate banks and non-bank financial institutions charge the public on loans and advances is even at much higher levels, making businesses and individuals look at ability to repay before going for such loans.

V. Sreedharan, Managing Director of Bank of Baroda (Ghana), told the Financial Intelligence in an interview that banks in the country, including his own have now been very cautious as to how they extend credit.

He acknowledged that the first quarter or this year was particularly challenging, as a result of which his bank tightened credit conditions to maintain its portfolio quality.

He noted that the current economic challenges have made it increasingly difficult for many to honour their debt obligations, for which reason bankers undertake all required diligence before giving out loans.

These challenges not withstanding, the Governor noted that the banking sector in country remains very strong and analysts say it remains one of the sectors with the brightest opportunities despite increasing competition.

The inability of homeowners to make good their defaults in mortgages, the bundling of such credits in securities and poor judgment by finance heads sparked the credit challenges in the US that eventually deteriorated into what had been predicted to become the world’s worst recession.