This means that out of the GH¢235.5 billion of loans and advances that were disbursed to businesses and individuals in 2016, some GH¢6.17 billion were in default or close to default.

Although still on the high side, the decline in the NPL ratio is fresh news for the banking sector, which has been grappling with a brunt of challenges that  the current economic malaise has imposed on the lending public.

Data from the Bank of Ghana (BoG) showed that from 14.7 per cent in December 2016, the NPL ratio peaked at 19.3 per cent in May before easing to 19 per cent in September and October. It then dropped further to 18.8 per cent in November before ending the year at 17.4 per cent, on the back of he phased payment of the energy sector debt.

With the sector’s debt recovery strategy still in place, Governor of BoG, Dr Abdul Nashiru Issahaku, said his outfit expected the figure to drop.

down further in the coming days.

“What we put out was a restructuring that has taken place until November but we have had some pay downs in December to the bulk oil distribution companies (BDCs), among others, and that has not been factored into the calculation of the NPLs,” he said in a recent interview.

“So, by our next reporting, we should see the NPLs come down further,” he added.

Cause for concern

Notwithstanding the improvement in NPLs, a former Deputy Governor of the BoG, Mr Emmanuel Asiedu-Mante, said the latest trend was worrying and was a cause for concern to both the banks and the regulator.

“Nationally, the ceiling for NPL ratio should be around five per cent. Anything beyond that should be a cause for concern; and for ours to be at 17.4 per cent, I think it is too high,” Mr Asiedu-Mante said.

He, however, explained that the trend was not surprising, given the challenges businesses faced in 2016.

“Because of the ‘dumsor’ (power outages) that we went through last year, a lot of businesses, especially those in the informal sector, collapsed while others had to lay off workers, and all these will impact negatively on bank loans that they have contracted.

“So, these (the NPL ratios) are telling you that the private sector loans were not performing and the borrowers were not in a position to repay,” he added.

Drop in private sector credit

Over the past three years, shortages in energy supply have combined with strong fiscal deficit, rising cost of credit and high taxes to rob the shine off the private sector.

This has led to a slow down in the rate of growth in industry and the agricultural sectors, where a chunk of bank credit is disbursed to.

Although loan disbursements continued in earnest, the rate of growth has slowed, with banks opting to keep cleaner loan books in the midst of dampened consumer and business sentiments.

BoG’s data showed that real private sector credit (PSC), which is adjusted for inflation, declined by 1.8 per cent to GH¢159 million in December last year. As of December 2015, real PSC had grown by 5.8 per cent to GH¢163.2 million.

Impact on growth

While admitting that the decline in PSC was a worry to the private sector, Mr Asiedu-Mante said it was the best management decision to counter growing NPLs.

“When I was chairing the Board of Stanbic, anytime I realised that our NPLs were going up, I usually put brakes on more lending and then ask the staff to focus more on collection.”

“If you have given loans and the people are not repaying, what is the sense in continuing to give more loans?” he asked.

Prof. Peter Quartey of the Institute of Social, Statistical and Economic Research of the University of Ghana, Legon, described the NPL ratio as a vicious cycle that had engulfed the economy.

“It’s because businesses are not able to repay their loans and if they can’t repay, it also affects the banking sector and other sectors and that also affects the economy,” he said.

On the impact on economic growth, he said banks normally factored NPLs into the pricing of credit, explaining that high default rates will mostly translate into high interest rates, which is disingenuous to the growth of the private sector and the economy at large.

High NPLs also constrain the ability of businesses and banks to expand and contribute to economic growth, Prof. Quartey, who heads the Economics Department of the University of Ghana, Legon, added.

“Remember that these (NPLs) are funds that when repaid, the banks can unlend to those who have deficits.”

“Thus, if banks lend and a significant proportion is not coming back, then it definitely will affect businesses’ ability to borrow more to invest and produce and that ultimately affects economic growth,”