Credit risk threatens banks

Credit risk is one of the key risks facing the banking industry in the country, a survey conducted by PricewaterhouseCoopers (PwC) has shown.

Credit spreads, macro-economic trends, currencies and risk-management quality complete the list of the top-five risks that threaten the banking industry in emerging economies.

The maiden 2012 Business Effectiveness Benchmarking Survey (BEBS) published by PwC, which covered 11 banks under the banking industry category, showed a median of 11.4 percent for non-performing loans (NPLs) as a percentage of total loans and advances, 36 percent for growth in operating assets, 8.3 percent for interest margin, and 2.3 percent for Return on Assets employed (ROA).

The survey sampled the views of people in the financial services sector and regulators on what they believe are the next “banana skins” on which the industry is likely to slip.

The eight key sections surveyed included people, business insights, process, systems, internal audit, governance and compliance, inventory and supply chain, and corporate social responsibility.

One of the patterns in the banking sector that increases credit risk is the high interest rate on most lending facilities, as the more expensive the cost of borrowing, the higher the risk of default.

In recent years, banks in Ghana have had to increase their provisions for credit losses as the volume of NPLs soared, reaching 20 percent of all loans in February 2010 before tighter policies helped to stem the rise.

NPLs have now fallen to 14.2%, the Bank of Ghana said this month. Speaking at the launch of the findings, Dr. Ishmael Yamson, Chairman of the President’s Economic Advisory Team, said oftentimes “failed businesses are quick to blame external influences instead of looking inward and benchmarking themselves against others.”

He urged businesses to challenge themselves and take interest in knowing what is happening around them.

“The 2012 BEBS has given companies the opportunity to ask themselves whether they are as good as they have always considered.”

Deputy Minister of Trade, Dr. Joseph Annan, noted that Ghana cannot continue to see the private and public sector as two separate “tribes”, and urged PwC to expand the scope of the research to include more companies and the public sector.

Meanwhile, PwC’s findings for the mining industry showed government is more likely to intervene in the mining sector with regulations requiring more stringent operating conditions, where there is a perception of systematic performance issues.

“A key challenge in the sector is the lack of comparable data and significant inconsistencies in the level of transparency. Some companies are reluctant to provide health and safety statistics while others provide full disclosure,” it said.

The survey revealed that it cost US$657 to produce an ounce of gold in 2010. Average number of fatal accidents in the industry that year was 14, while average injury downtime was 25 days.

Safety incidents have a serious and direct impact on an organisation, primarily through the risks posed to employees and contractors.

Their impact is also felt through business interruption and corporate reputation damage, the survey said.

For all companies surveyed across sectors, a relatively higher percentage of the respondents, 64 percent, report all issues to the board -- with the remaining respondents reporting just a subset of issues.

Entities that report a subset of issues usually have an internal governance and compliance framework that includes at least internal and external audit. This framework enables the board to focus on major issues affecting the entity.

An impressive 41 percent of respondents said they have a whistle-blowing procedure in place that allows for reporting of irregularities by staff members, and may allow the whistleblower to remain anonymous during the process.

The average corporate social responsibility (CSR) budget as a percentage of revenue was 0.1 percent. A minimal 23 percent of respondents do not have a CSR strategy, while 18 percent of respondents said they involve their employees in their various CSR activities.

Survey respondents were picked from banking and capital markets, 11; insurance, 3; mining and energy, 4; manufacturing, 3; others (media, telecom, automobile), 3.

The revenue range of respondents was between GH¢3.7million and GH¢250million.