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Pressure pushes banks to tighten credit for businesses

Wed, 24 Jun 2020 Source: thebftonline.com

Despite measures by the central bank to free-up capital for banks to support the private sector and hasten revival of the economy following the ruin caused by COVID-19, banks say they will remain extremely cautious about it as the hard times are affecting customers’ ability to pay back loans in time.

A survey conducted by the Bank of Ghana and published in the Banking Sector Report (May 2020) shows gross loan advances growth contracted 0.8 percent in the first quarter of 2020, compared to 2.6 percent growth recorded in the same period last year.

This is because banks have tightened their credit stance to enterprises and households due to an emerging challenging operating environment – including the general slump in economic activity, lockdown measures to contain the virus, the resultant temporary closure of some bank branches, and anticipated loan repayment challenges.

Some experts in the industry believe it is a step in the right direction by banks, considering the situation at hand. One of them is the former Deputy Managing Director (retired) – Finance and Administration at the Prudential Bank, Steven Asare, who says even though the argument is made for banks to support the private sector more in these difficult times, it is still prudent for them to take a cautious approach as the risk is high in certain sectors of the economy.

“One could reasonably say that in view of the economy’s slow-down, banks should extend more credit for customers to revive the economy. The problem banks will face is that the economy is interrelated. So, if someone applies for a facility, the bank must do a risk analysis about what the person wants to use the loan for and which sector he operates in. Once that risk analysis is done and they see there is a problem with the customer’s ability to repay the loan, the bank ought to be very cautious.

“So, there are some sectors in which it would be prudent to advance loans, and there are other sectors that the banks’ risk assessment would not make it prudent to advance loans to. So it is proper for the banks to take a cautious stance for now, because the key issue is the ability of a customer to repay after taking the loan,” he told B&FT in an interview.

Despite the tight credit stance to enterprises and households, the survey further adds that banks will ease it for small and medium-scale businesses – an action the regulator sees as a likely response to measures introduced by it to encourage banks to support critical sectors of the economy.

Some of the policies introduced by the Bank of Ghana include the reduction in Primary Reserve Requirements from 10 percent to 8 percent for banks, aimed at releasing extra liquidity for banks to channel into lending, including to support critical sectors of the economy.

Another one is the reduction in Capital Conservation Buffer (CCB) for banks, from 3.0 percent to 1.5 percent. This policy effectively reduces the minimum Capital Adequacy Ratio (CAR) from 13 percent to 11.5 percent, and complements the policy of supporting credit growth. It therefore removes credit extension constraints that some banks may face due to CAR limitation.

And again, the central bank further reduced the Primary Reserves for Savings and Loans companies, finance houses from 8 percent to 6 percent; and for microfinance companies and rural and community banks by 200 basis points. This liquidity release is to support extension of credit to the micro, small and medium-sized enterprises, and low-income households during these challenging times.

Source: thebftonline.com

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