The Governor of the Bank of Ghana, Dr Ernest Addison told the Graphic Business on the sidelines of the Monetary Policy Committee (MPC) news conference in Accra on July 24 that an asset quality test of the banking sector revealed that the banks were not properly classifying their loans.

A Non-Performing Loan (NPL) is the sum of borrowed money on which the debtor has not made his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default.

“So going forward, we are hoping that the proper classification will be done so that we are on top of the issue of the loans that are performing and those that are not performing”, Governor Addison said.

“I mean if we are not properly classifying then obviously our ability to supervise and monitor will be compromised, so we had to undertake a special exercise to ascertain the loans that were performing and those not performing”.

“If we do that, I don’t think we would be in a situation where we are suddenly confronted with numbers that we didn’t know we were sitting on”.

“So yes, the regulator was not tough enough but going forward, the regulator will be tough”, he said in response to a question.

The indicators of asset quality as at April 2017 reflected some deterioration over the April 2016 performance.

Debt obligations

Investors have blamed erratic power supply as reasons for their inability to fulfill their debt obligations.

 But analysts say the industry’s NPL ratio is expected to improve following the conclusion of restructuring arrangements for the industry’s exposure to the Bulk Oil Distribution Companies (BDCs)

Also, as government continues to pay down the energy-related State-Owned enterprises (SOEs) debts according to the agreed quarterly schedule, banks’ exposure to the energy sector will decline.

This, together with additional efforts by banks to tighten credit risk management practices and intensify loan recovery efforts, particularly for large non-oil related exposures, could lead to further reduction in the NPL ratio.

The industry’s stock of NPLs increased by 24.5 per cent to GH¢7.15 billion in April 2017 from GH¢ 5.74 billion in April 2016.

The year-on-year growth in NPLs in April 2017, however, represented a slowdown in the accumulation of NPLs from the 80.5 per cent year-on-year growth recorded in April 2016.

Asset quality

The deterioration in asset quality was largely attributed to the downgrading of some facilities following the Asset Quality Review of banks’ loans.

Adjusting for the fully provisioned loan loss category, the NPL ratio fell to 10.5 per cent in April 2017, against 10.4 per cent in the same period last year.

Rating agency, Moody’s say, the latest monetary policy rate reduction will reduce banks’ lending rates and asset risks, which increased substantially in 2016 and caused banks’ nonperforming loans to rise to 21.7 per cent of gross loans as of May 2017 from 14.6 per cent at the beginning of 2016.

“We expect borrowers’ debt repayment burden to fall further as the average lending rate decreases. The system average lending rate declined to 30.5 per cent in April 2017 from 32.03 per cent in November 2016, when the Bank of Ghana first began lowering the monetary policy rate, and we expect additional reductions in the system’s average lending rate to follow.

Lending rates

Lower lending rates, together with declining inflation, will provide cash flow relief to borrowers, improving their repayment capacity and improving banks’ asset quality, although the system’s nonperforming loan ratio will remain high,” it pointed out.

Moody’s further states that the rate cut and falling inflation also will support the country’s operating environment, boosting demand for new loans and benefiting banks’ revenue.