More bank loans go bad

Banks have tightened further credit to private sector enterprises and consumers as more loans are going bad, reflecting challenges in the economy, the Bank of Ghana has reported.

The tough posture of the banks in advancing credit has left many private enterprise managers in uncertaintyamidst increased demand for bank loans for inventories, working capital and debt restructuring.

According to the Bank of Ghana’s April 2015 bank lending survey, the firm stance taken by financial institutions in granting loans to large enterprises and consumers has been exacerbated by lower expectations of banks regarding the economic environment, reduced access to market finance, increased cost of funds, and balance sheet constraints.

The credit portfolio analysis of the banks in the first quarter of this year shows that banks are more likely to provide financing facilities for businesses engaged in commerce and finance, services and utilities than those in mining and quarrying, construction, agriculture, forestry and fishing.

The problem of obtaining bank loans has been aggravated by erratic power supply and collapse of the cedi, which has impacted negatively on input costs and production output of smaller firms, putting substantial pressure on profit margins.

As a result of the difficulty in the business operating environment, the Bank of Ghana has recorded that bad loans on banks’ books are rising. The central bank has pegged the non-performing loans (NPL) of the banks for first three months of the year at 11.4 percent, which is a marginal increase over the 11.3 percent recorded at the end of December 2014.

The central bank reported: “The ratio of NPL net of provisions to capitalof 12.5 percent in March 2015 was however a deterioration over the March 2014 position of 9.7percent. The adjusted NPL ratio (i.e. NPLs ratio minus the loss category) also deteriorated in March 2015, to 5.5 percent from the 4.4 percent recorded in March 2014.

“Credit to the private sector contributed 96.8 percent of the total banking sector’s non-performingloans as at March 2015 compared with 91.1 percent in March 2014. The proportion of banks’ NPLs attributable to the public sector improved from 8.9 percent in March 2014 to 3.2 percent in March2015.

“Even though private enterprises received only 69.8 percent of the private sector credit, they accounted for 87.7 percent of NPLs in the sector as at March 2015 compared with 70.2 percent of credit received and 81.4 percent of NPLs for the same period in 2014. The highly disproportionate level of NPLs associated with private enterprises was driven mainly by indigenous enterprises, which received 57.8 percent of credit to private enterprises but accounted for 79.9 percent of NPLs as at March 2015.

“However, while foreign enterprises’ share of private sector credit declined, their contribution to private sector NPLs increased marginally over the period under review. Households’share of private sector credit and contribution to NPLs increased marginally over the review period.”

The quality of loans provided by the banks is expected to deteriorate further with the hikes in interest rates and inflation, weakening of the currency, and general mismanagement of the economy.

Last week, some business organisations hinted that more companies will default on their debt obligations due to the recent floods and fire disaster, which destroyed the stocks and business processing of many firms.

The Ghana Chamber of Commerce and Industry said: “This disaster will certainly affect businesses, which will in turn affect the nation’s economy and livelihood of the citizenry. Businesses may collapse, and credit facilities are likely to be dishonoured”.

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, a decision that has received criticism from Vice President Paa Kwesi Amissah-Arthur and other policymakers and business executives.

The Managing Director of Cal Bank, Frank Adu Jnr., has defended banks trading in money market instruments and indicated that his bank will now concentrate on pushing up its investments in Treasury bills and other secure securities, and cut its lending to consumers and businesses, as long as interest paid on short-dated securities remains at or goes above the current 25 percent.

According to the Bank of Ghana, banks have shored-up their investment in Treasury bills from GH¢8.47billion in December last year to GH¢8.73billion in March 2015.