Measures introduced by the regulator to help the banking industry remain strong in this pandemic season seem to be bearing fruit, as new data show banks’ dependence on the central bank for liquidity support has reduced significantly.
The Statistical Bulletin Report (June 2020) shows there has been a drastic 91.7 percent decline in credit support from the Bank of Ghana to the banking industry since the beginning of the year. In January, the Bank of Ghana extended more than GH¢1.9 billion credit to the sector compared to GH¢158 million in June.
This, among other reasons, means the banking industry – even after the pandemic hit the country in March – has the required amount of funds to operate and become profitable; thanks in part to measures such as a reduction in the reserve requirement that was introduced earlier by the regulator to cushion the industry from immediate shocks of impacts from the pandemic.
This argument is supported by a chartered accountant and retired banker Stephen Asare, who told the B&FT in an interview that the reduction of credit support to the sector from the regulator is an indication of the banking industry’s robustness, as banks no longer depend heavily on such temporary interventions from the central bank.
“The reduction of reserve requirement by the Bank of Ghana has given banks some liquidity, which means they will not require further assistance from the central bank. Once banks are liquid enough, they will not avail themselves for liquidity support from the Bank of Ghana. It means that things are gradually returning to normal for the banks, and confidence is back in the system,” he said.
In March when the country recorded its first case of the pandemic and started seeing its impact on the economy, the central bank announced a series of measures which included reduction of the Primary Reserve Requirement from 10 percent to 8 percent to provide more liquidity to banks and SDIs – as well as reduction of the Capital Conservation Buffer (CCB) for banks from 3 percent to 1.5 percent.
This directive has subsequently reduced the industry’s reserves with the central bank to GH¢13.3billion in June from the GH¢17.5billion in March 2020.
It further reduced provisions for loans in the ‘Other Loans Especially Mentioned’ (OLEM) category from 10 percent to 5 percent for all banks and SDIs, as a policy response to loans that may experience difficulty in repayments due to a slowdown in economic activity; and Loan repayments that are past due for Microfinance Institutions for up to 30 days shall be considered as ‘Current’, as is the case for all other SDIs.
Again, the regulator required banks and SDIs to desist from declaring and paying dividends, and from making other distributions to shareholders for the 2019 financial year – unless the Bank of Ghana was satisfied that such institutions met the regular prudential requirements and were not relying on additional liquidity released by the regulatory reliefs provided by the Bank of Ghana.
The central bank also warned banks to refrain from utilising the released liquidity to purchase Government of Ghana and Bank of Ghana Securities.