There is an issue plaguing the banking sector which is slowly killing the economy of the country. Yes, I am talking about uncontrolled lending. It seems like the banks have lent relentlessly and this is causing them to accumulate a lot of Non-Performing Loans (NPLs). Loans are considered to be non-performing when they are equal to or greater than 90 days in arrears or where management believes a loss may be incurred.
Ghana is right now in a dire need to revive private investment. In face of such a crisis, when the country has $ GH¢7.96 billion stressed assets at the end of end of June 2017, things are definitely serious. The ratio of NPLs to total gross loans (NPL ratio) experienced an increasing trend between 2007 and 2010 from 6.37 per cent to 18.08 per cent and declined to 11.27 per cent in 2014 and thereafter increased to 17.70 per cent in 2016 and 21.2 percent in June 2017.
Persistently high NPLs hold down credit growth and economic activity
High NPL ratios in Ghana have considerable and wide-ranging impacts; for both banks and society at large.
For banks, NPLs tie up part of their capital base without providing a commensurate return, reducing profitability and increasing capital requirements (NPLs have a ‘risk weight’ of 150 percent under the Basel 3 Standardized Method).
For Ghanaian society, a banking system which is not firing on all cylinders, due to the drag of NPLs, does not have the capacity to drive net new lending (in particular to SMEs). This constrains economic growth and disrupts the functioning of the monetary policy transmission mechanism (from the central bank to real-economy borrowers).
Accelerating the resolution of NPL in Ghana requires a comprehensive approach based on three key pillars:
Enhanced prudential oversight (“touch love”).
Despite the Asset Quality Review launched in 2016, little has been achieved in resolving the underlying assets to which banks had lent because most of the assets still suffer from very high levels of bank debt.Similar to Viral Acharya (Deputy Governor of Reserve Bank of India), I am proposing a “tough love” style approach towards the banks from now onwards. This is because this “tough love” measures will work towards the benefit of the banks but since the banks have been reckless towards lending in the past, such “tough love” measures will include the Bank of Ghana taking up the role of the parent that will put some additional regulations such as mandatory write off and time-bound restructuring targets on banks’ NPL portfolios. In addition, Bank of Ghana should enforce the following provision under the Specialised Deposit-Taking Institutions (SDIs) Act, 2016 (Act 930) with no mercy:
Banks with NPLs above a set threshold (for example, 10 percent) should be subject to a more intensive oversight regime to ensure that they conservatively recognize and proactively address asset quality problems.
Bank of Ghana exercising its powers under Section 93 of the Act to require Banks to submit accurate information to credit bureaus and applying the penalty for the submission of inaccurate, incomplete, delayed and non-submitted information to credit bureaus.
Enforcing conservative provisioning and write off guidance under International Financial Reporting Standards (IFRS) 9- Section 78
Conservative application of accounting standards should be supplemented by micro- and macro prudential measures, such as time-bound targets for resolving delinquent assets and raising risk weights on impaired assets of a certain vintage (above the current 150 percent, under the “standardized approach” adopted by all Banks in Ghana).
As permitted by section 78 (1) (b)l, the Bank of Ghana applying the Basel Committee on Banking Supervision publication 155- Principles for sound stress testing practices and supervision[1] to require all Banks to perform stress testing as part of Internal Capital Adequacy Assessment Process (ICAAP) at least on a quarterly basis and for those Banks that fails the stress testing, Bank of Ghana will then exercise the following rights under Act 930 with no mercy:
Exercise the right to require some Banks to maintain additional capital to address concentration of risks (Banks with high NPLs is an example). Section 30
Exercise the right to increase to prescribe one or more capital buffers above that required by the minimum capital adequacy ratio for Banks with high NPLs. Section 29 (6)
Exercise the right to prescribe leverage or gearing ratio for Banks with high NPLs. Section 29 (7)
Submission of capital and liquidity restoration plans within 45 days of BoG’s requesting for
Banks with capital and liquidity adequacy breaches The institution has 180 days from submission to conclude the capital and liquidity restoration process – Section 105(2b)
BoG imposes restriction on growth of assets or liabilities – Section 105 (5a)(5b)(5c)
If the problem persists after the first attempt BoG will provide a 90 day window for a new plan and a further 180 days to correct – Section 106 (1a) (1b)
where the initial 2 attempts fail, BoG will place the institution into official administration – Sections 107-122 and
Section 123 event where BoG revoke Banking license when they believe the institution will be insolvent within 60 days
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Author: Emmanuel Akrong