Recapitalisation won’t affect lending to private sector — Experts

The new minimum capital requirement set by the central bank will not reduce lending to the private sector, two academics have told the B&FT, in the wake of concerns that the more than 230 percent increment could squeeze lending.

The first of the academics, Dr. Frank Ebo Turkson of the Economics department of the University of Ghana, said he rather sees the development leading banks to lend more in order to accrue enough income and profit to recapitalise.

“Don’t forget that when banks give loans they make income out of that and it is through the income that they make their profit, and that is the one that they can put back in the form of recapitalization,” he said. “So, it should rather put them in a position to be giving out more loans to create income so they can use the profit to recapitalise their banks,” he said.

“So, it shouldn’t affect their lending to the private sector at all. Because, what is the point? You make income when you are giving out loans, and it is your income that you make profit from that you can retain part of the profit to recapitalise, and you cannot hold people’s deposits as part of the funds that you are going to use to recapitalise,” he added.

When the Bank of Ghana (BoG) announced the GH?400m new minimum capital for banks, which represents a more than 230 percent increment from the GH?120 million, it directed that all banks raise the amount through fresh capital injection or capitalisation of income surpluses, or a combination of both, and not to set it off against credit risk reserve and unaudited profit.

The debate has since been raging on as to whether most of the banks, which are very thinly capitalised, will be able to meet the requirement, and whether it would not squeeze lending to the private sector, when the banks are already crying over a high bad loans ratio.

When reached for comments, Francis Owusu-Acheampong, Lecturer at the National Banking College, supported Dr Ebo Turkson’s position, saying what will reduce lending to the private sector is the soaring Non-Performing Loans (NPLs) and not the new capital requirement.

“If the NPLs stand where they are or increase, then it is safe to think that the additional capital won’t have any effect on lending to households and businesses. The factors that created the NPLs in the first place are the issues we should look at so that they don’t recur.

The important thing now is to deal with the factors. And the truth of the matter is that government is the largest culprit so far as the NPLs are concerned. So, if it is able to repay all the debts owed to the private sector, then it brings more resources to the banks. Certainly, when these banks have the resources, they are not going to sit on it; they will lend to the private sector,” Mr. Owusu-Acheampong told the B&FT.

The July 2017 Banking Sector Report shows that diminishing credit portfolio of banks, largely owing to NPLs, have resulted in tightening credit to households and enterprises.

“Banks’ credit stance on loans to households for consumer credit and other lending and for house purchases tightened slightly in the June 2017 survey round,” it states.

“The tightening credit conditions for house purchases were consistent with the observed decline in real credit to households over the past year. Banks cited the increasing share of adversely classified loans in total credit portfolio as one of the reasons for tightening the credit stance on loans to both enterprises and households.”