Banks adopt cautious lending practice amid current economic headwinds
The banking sector is grappling with a challenging economic environment, prompting banks to adopt more conservative lending practices.
CEO of the Ghana Association of Banks (GAB), John Awuah, highlighted several factors contributing to these challenges, including significant losses on government bonds, increased impairments on loans, and rising operational costs.
The non-performing loans (NPL) ratio in Ghana rose from 14.3% in April 2022 to 18% in April 2023, indicating a higher proportion of loans facing repayment issues.
Banks are exercising caution in their lending activities due to economic uncertainties and prevailing interest rates. There is a consensus that lending rates should align with economic conditions to avoid overextending their balance sheets and incurring potential loan write-offs.
While banks are taking a cautious approach, they remain open to supporting viable projects and deals, albeit with a strong emphasis on mitigating risks.
“As it is now, if you are a bank and you’re bullish on loans, you may be taking quite significant risks because where the market rates are, very good businesses can struggle during periods such as this. That is why we are all working to get the rates at the right place. Of course, we are cautious because we do not want to unduly leverage the balance sheet in a manner that you sanction loans today and tomorrow you are writing them off.”
“The industry wants to lend but in a more secure and safe manner that does not unduly open the industry to risks. We’re not necessarily scaling back, we are just making sure that, the loans that are sanctioned are loans that you have a very good expectation of getting the money back,” he remarked during an interview on the JoyNews PM Express Business Edition on Thursday.
The 2022 Domestic Debt Exchange Programme (DDEP) had a significant adverse impact on banks, particularly locally-owned ones. Impairment losses stemming from the DDEP have left some banks in a technically insolvent state, necessitating additional capital infusion or participation in the Ghana Financial Stability Fund.
Capital support from international organizations such as the International Monetary Fund (IMF) and the World Bank, alongside the Ghanaian government, is expected through the Ghana Financial Stability Fund (GFSF) to help banks rebuild their capital buffers.
Local banks have submitted plans to rebuild their capital buffers, subject to approval by the Bank of Ghana. These plans aim to address the financial challenges faced by these institutions.
The challenging economic landscape may exacerbate loan repayment difficulties for individuals and businesses, further increasing loan impairments and posing risks to banks’ asset quality.
Ghana’s banking sector is navigating a complex economic environment, with banks taking prudent measures to manage risks and ensure operational stability amid economic challenges and the aftermath of the DDEP.
