The BOG intends to compel banks to lend more to the private sector space. The Governor said this in the latest Monetary Policy Committee (MPC) roundup. This announcement is not new to the private sector. In fact, it may not strike a nerve due to the many times businesses have heard this and yet seen little. However, this time there may be a regulatory condition.
The Technicality
In this BOG move, the central bank intends to explore a regulatory technicality to push banks to give more loans to the private sector. To also support and strengthen the growth of credit to the private sector, the Bank of Ghana will explore the possibility of setting a minimum loan to deposits ratio. The move will ensure that banks channel more deposits into funding viable private sector projects.
The Bank of Ghana will hold further consultations with the banking industry to determine the impact of such a regulatory measure. Then if warranted, determine the level of such a ratio and appropriate monitoring and enforcement mechanisms to promote its effectiveness.
Credit to Deposit Ratio
According to the latest banking industry reports credit-to-deposit ratio of the industry has reduced from 77.9% in January 2016 to 51.2% in June 2019. It implies that over the last three years, there is a reduction in amount of money banks have given out as loans from deposits. The acceptable global rate is 60% – 70%. Banks are taking solace in investing in government instruments to earn low-risk returns.
Also Read: Banks make more from investments that from loans
Credit Referencing Bureau
Improving credit to the private sector cannot however be without a working framework to forestall defaults that give rise to non-performing loans. Indigenous private sector alone contributed to 74.6% of the total NPLs of the sector.
The Central Bank therefore is working to put in measures to reinforce the existing credit infrastructure. Accordingly it hopes to strengthen enforcement of the use of credit bureau system under proposed Regulations to be made by Parliament pursuant to the Credit Reporting Act of 2007 (Act 726). Furthermore, to strengthen the collateral enforcement mechanism under a new Borrowers and Lenders Bill. This will improve the quality of loans made by banks. Lastly, to facilitate recovery of loans and collateral.
Also the regulator will expect banks to further deepen transparency in the determination of lending rates. Hence they need to develop and publish a clear framework on the risk premium build-up that impacts on an individual borrowers’ credit profiles. This will provide borrowers with a more reliable basis for negotiating lending rates with their banks,
