Banks tighten credit as coronavirus rages - survey

The Bank of Ghana’s (BoG) latest credit survey has revealed that businesses may have difficulties in accessing credit as banks begin to take a more cautious approach to lending as a result of the COVID-19 pandemic.

The survey, conducted in February but published this week, showed that banks have started tightening their credit stance—a situation the central bank said will persist for at least two months.

“The February 2020 credit conditions survey round revealed that banks reported net tightening in the overall credit stance on loans to enterprises, except SME loans, with the likelihood of further tightening two months ahead. Prospects of further tightening for enterprises seem to reflect banks’ response to the fallout from the COVID-19 pandemic,” the survey said.

The tightening credit stance is coming against the BoG’s recent measures implemented to get banks to commit extra resources to businesses that have been hit by the coronavirus.

The central bank last month announced a 150-basis-point reduction in the monetary policy rate and further persuaded commercial banks to reduce their interest rates by about two percentage points.

It also reduced the primary reserve requirements from 10 per cent to 8 per cent to make additional liquidity available to banks for on-lending to critical sectors of the economy, in a bid to moderate the expected slowdown of economic growth this year.

In addition, the central bank cut the capital adequacy ratio from 13.0 per cent to 11.5 per cent, aimed at easing prudential regulatory constraints that some banks may face in increasing the size of their loan book.

Banks’ profitability

According to the BoG’s latest banking sector report, banks’ profit outturn was stronger in the first two months of the year, with a 38.8 per cent year-on-year growth in profits in February 2020.

This was higher than the 31.5 per cent growth in the same period last year, due to significant increases in banks’ income, which outpaced the growth in operating expenses.

The report stated that net interest income grew by 25.9 percent on the back of a 22 percent growth in interest income, higher than the 14 percent increase in interest expenses.

With declining interest rates over the period, growth in interest income and interest expense was mainly on the back of increased business volumes.

Total operating expenses also grew by 18.6 percent in February 2020 compared with 8.6 percent in February 2019, due to increased staff costs and other operating expenses.

Similarly, total provisions (loan loss provisions and depreciation) recorded a higher growth of 6.5 percent in February 2020 than the 2.2 percent recorded in February 2019.

Analysts expect the industry to experience some of the negative effects of the coronavirus crisis, with the reduced rate of economic activity and increased financial risks of businesses likely to affect banks’ income streams over the course of 2020.