RESTORING macroeconomic stability is a critical step in addressing the rising Non-Performing Loans (NPLs) in the banking sector, the Director of the Institute of Statistical, Social and Economic Research (ISSER), Prof. Peter Quartey, has said. 

He explained that while the Domestic Debt Exchange Programme (DDEP) might have contributed to financial sector pressures, the core risk elements for banks which include default risk, institutional risk and exchange rate volatility remain unchanged.

The Governor of the Bank of Ghana, Dr Johnson Asiamah, early last month sounded the alarm on the urgent need to tackle the high levels of non-performing loans (NPLs) in the banking sector, warning that the issue poses a significant threat to financial stability. 

At a meeting with the CEOs of commercial banks, Dr Asiamah highlighted the challenges facing the financial sector, particularly the alarming NPL figures that are undermining the sector's overall health.

He pointed out that some local banks were struggling with exceptionally high NPL ratios, with one local bank reporting an NPL ratio of approximately 81 per cent and another at 62 per cent. In contrast, the highest NPL ratio among foreign banks stands at around 21 per cent, stressing that these figures are a major concern and require immediate attention to ensure the stability of the financial sector

This means that for every 100 Ghana cedis lent out by these banks, a staggering 81 cedis and 62 cedis respectively are not being recovered. In stark contrast, the highest NPL ratio among foreign banks stands at around 21 per cent, underscoring the disparity in risk management and lending practices between local and foreign banks.

The Governor's call to action highlights the need for banks to reassess their lending practices, strengthen their risk management frameworks, and implement more effective debt recovery strategies. Additionally, regulatory bodies must ensure that banks adhere to prudent lending standards and maintain adequate provisioning for potential losses.

Risk assessment

But Prof. Quartey called for a risk assessment of banks. “The risk element that banks face has not changed, the impact of DDEP was felt, the default risk, institutional risk and exchange rate within the economy still persist and that is affecting the profitability of the borrowers.”

When this continues, the bank’s profitability is going to be affected; once there is a high default rate, it means you have to make provision for the loss, provision for the default and that is going to affect your bottom line, your profits,” he said.

In an interview with the Graphic Business, Prof. Quartey, an economist, said the impact of such financial stress went beyond banks’ balance sheets. 

“When banks become less profitable, it affects employee compensation, limits their ability to lend to businesses and ultimately slows down economic activity. If this persists, it could threaten the survival of some banks,” he cautioned.

Key drivers

Attributing the surge in NPLs to multiple economic challenges, he explained that many borrowers take loans in cedis, invest in imports or foreign currency-related activities, and struggle to repay when the cedi depreciates sharply.

He said: “The depreciation increases their repayment obligations beyond their projected income, pushing more loans into default.” 

He explained that institutional weaknesses in loan monitoring and disbursement further compound the problem especially in cases where funds are not used for their intended purposes, reducing the viability of the borrower’s project and raising default risk.

Credit risk management 

To address the issue, Prof. Quartey urged banks to tighten their credit risk management systems.

“Credit approval processes must be more stringent. Banks need to ensure the viability of a borrower’s business plan and monitor any inherent risks more closely. Strengthened loan monitoring mechanisms are also necessary to prevent the misapplication of funds,” he stated.