Business News Tue, 30 Jun 2015

Corporate failures imminent

Sources in the finance and banking sectors have warned of imminent massive corporate failures as banks in the country are reluctant to work with businesses to restructure debts.

This, they said, is increasing the risk to the economy, businesses and consumers.

The central bank has pegged the non-performing loans -- that is, loans that have gone bad -- of banks for the first three months of the year at 11.4%, which is a marginal increase over the 11.3% recorded at the end of December 2014.

The development is of great concern to managers of the economy because it comes at the same time as more banks are having increasing challenges in recovering loans, a reflection of the effects of depreciation of the cedi, extreme high interest rates, weak economy, high inflation and low confidence.

The sources, who spoke on condition of anonymity, accused banks of not declaring the true levels of non-performing loans.

They warned that failure of the banks to write off loans may lead to a large and unnecessary number of corporate failures, hurting business confidence and crippling the economy.


Recently, business associations, including the Ghana Chamber of Commerce, have hinted that more companies would default on their debt obligations due to the recent floods and fire disaster which destroyed the stocks and business processing of many firms.

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

According to them, the effects of depreciation of the cedi, extreme high-interest rates, weak economy and low confidence have all contributed to lower foreign investment, less availability of foreign currency financing, higher cost of local financing, reduced business profitability and increased risk of corporate failures.

The finance and banking experts challenged international institutions such as the International Monetary Fund (IMF) and World Bank, as well as the government to address the issue of Non-Performing Loans (NPLs) and consider plans for recapitalisation of banks in the country.

They even went to the extent of calling for a bailout for banks. “Banks must in turn be prepared to restructure their corporate loan portfolios to secure the long-term survival of the business community,” one of them said.

Another expert warned, “Failure to address these issues may mean banks will eventually inherit ownership of defaulting companies but without the necessary managerial skills and the personnel to manage or maintain these businesses.”


According to them, this would cripple the ability of businesses to provide goods and services to consumers, employ and pay living wages, which would most likely contribute to a much weaker economy, prohibiting any prospects of a recovery in the national economy.

The central bank has issued its second financial stability report for the year, and it notes that the banking sector’s ability to absorb losses as captured by the capital adequacy ratio (CAR) has declined during the first three months of the year.

According to the Bank of Ghana, the capital adequacy ratio of the banks declined from 17.9% at the end of December 2014 to 16.9% at the end of the first quarter of this year, on account of strong credit delivery and some loan write-offs during the period.

On a year-on-year basis, the capital adequacy ratio went down from 17.7% in March 2014 to 16.9% in March 2015.

At the same time, the sector’s tier-1 capital adequacy ratio -- a key measure of a bank’s financial strength -- also declined from 15.3% in December last year to 14.6% at the end of March this year.

Source: The Finder