Government must pay debt to banks quickly – Albert Essien

Banks are reeling under the weight of Non-Performing Loans (NPLs), and to cushion them, government needs to speed up payment of the over GHc 2billion it owes the them in respect of letters of credit they issued for the import of fuel, Albert Essien, former Managing Director of Ecobank Transnational Incorporated, has said.

Bank of Ghana figures show that bank’s Non-Performing Loans (NPLs) has risen to a six year high of 19.3 percent, whilst banks capital adequacy ratio –their ability to withstand shocks or unexpected losses– has also reduced from 17.9 percent in January this year to 16.6 percent currently.

“I think the government is well intentioned to remedy the situation and will come in to assist but this problem should be resolved quickly so that banks will get the necessary liquidity to continue with their business,” Albert Essien told the B&FT in an interview.

Mr. Essien, who is a new council member of the Ghana Stock Exchange (GSE), said the situation is “quite dire for some banks,” and that the payment is taking “a rather long time.”

The banks have complained severally that their over-exposure to the Bulk Oil Distributing Companies (BDCs) is a huge reason for the rising NPLs.

In an interview with the B&FT earlier this year, Managing Director of CAL Bank, Frank Adu, said banks will continue to face difficult times for at least the next couple of years as a result of their exposure to the Bulk Oil Distributing Companies (BDCs).

“The BDCs have a challenge in that they owe the banks so much money, and now the banks are no longer doing Letters of Credits to the BDC sector. That is obviously a big chunk of revenue wiped out.

When the International Monetary Fund (IMF) earlier this year published its second review report following assessment of the country’s progress under the Extended Credit Facility Arrangement, the Bretton Woods institution noted that while no new domestic arrears have accumulated so far, government has repaid GH¢600million of additional arrears to the BDCs that were identified by independent auditors.

The report went on to add that the planned arrears repayment in the 2016 budget is in line with the arrears clearance plan established under the programme whereby government plans to clear about GH¢2.3billion of outstanding arrears, including the provision of GH¢800million for the ongoing audit of additional claims by the oil importers (BDCs) related to losses due to under-pricing and foreign exchange losses in 2014 and early 2015.

Strengthening risk management

In view of the challenges, Mr. Essien said there are lessons to be learnt, including the need for banks to strengthen their risk management.

“When banks are making available balance sheets to support risk assets, they should make sure that the risk parameters are properly analysed from the perspective of the customer.

Banks, he added, should avoid risk concentration in some areas and rather focus on building broad businesses and also understand the sectors that they lend to.

“Banks have taken in too much of the oil sector debt and perhaps it was because it was profitable, which is always how it seems to be. Banks should also always look at the loss norms and as much as possible and avoid concentrations.”

Consolidation

Mr. Essien, a relentless advocate for consolidation in the banking sector, also said: “I have always said that scale is important in banking. If you look at it against the backdrop of the stress some of them are going through then it is true that you need to have a bigger balance sheet to absorb some of these losses and shocks.”