Reduce interest rates

–In addition to other measures to tackle NPLs – Banker

By Isaac AIDOO, Accra

A banker is advocating for lowering interest rates, strengthening the Credit Bureau System, implementing strong risk management practices, conducting stress testing, and improving corporate governance.

These steps are seen as essential to easing the repayment burden on borrowers, address the rising issue of Non-Performing Loans (NPLs) in Ghana and foster private sector credit growth.

The Bank of Ghana (BoG) recently reported that despite improvements in the banking sector’s performance, elevated credit risk poses a threat to the sector’s recovery process.

The industry’s NPL ratio stood at 24.1% in June 2024, up from 18.7% in June 2023.

Speaking to The New Finder, Mr. Samuel Acquah, Chief Risk Officer (CRO) at FNB Ghana, emphasized the importance of these measures in combating the increase in bad loans.

Key factors

He highlighted that an effective Credit Bureau System, which ensures banks report all defaulters, would improve credit assessments and enhances credit processes and governance, thereby building confidence in loan repayments and reducing defaults.

Mr. Acquah noted that for Ghanaian consumers and businesses, the rising NPLs increase the cost of credit, making it harder to access and stifling economic growth and employment.

Avoiding potential bank insolvencies

 “To avert systemic risks and potential bank insolvencies, a combination of strong risk management practices, stress testing, and improved corporate governance is vital,” he stressed.

“Ensuring loans are extended in the same currency as borrowers’ earnings can prevent mismatches that have previously impaired banks.”

Effects of severe currency depreciation

Mr. Acquah explained that in an inflationary environment, servicing currency-denominated loans becomes significantly challenging, a situation exacerbated by severe currency depreciation.

 “This dual pressure, with high interest rates alongside a depreciating currency, impacts borrowers with dollar facilities, making it extremely difficult to meet their obligations,” he noted.

When clients struggle to service their loans, their accounts transition from performing to non-performing loans (NPLs).

International financial standards mandate banks to provision for these NPLs, directly impacting their profitability and eroding capital.

“This eroded capital compromises a bank’s ability to extend credit and maintain operations, diminishing liquidity and driving away potential depositors, further weakening the institution,” Mr. Acquah explained.

Despite these challenges, there has been a marginal improvement in private sector credit, attributed to factors such as reduced inflation and economic upticks.

Central bank measures, like adjusting the Cash Reserve Ratio (CRR), have incentivized banks to extend more credit, contributing to this growth.

“The risk management strategies of Ghanaian banks, though robust and continually improving under Bank of Ghana’s supervision, are crucial in navigating these challenges,” said Mr. Acquah.

“Effective risk management and credit governance, alongside a strong risk culture, are essential in mitigating systemic risks.”

Regionally and globally, while Ghana faces similar challenges, the severity of NPLs varies across jurisdictions.

BoG’s ongoing efforts to protect the banking sector and maintain soundness are commendable.

However, individual banks must continuously improve their risk management and governance to navigate the challenging environment effectively.

Looking forward, the banking sector’s resilience will depend on adequate capitalization and robust risk management.

“Continuous collaboration among banks, the central bank, and the government is crucial in supporting economic recovery and growth,” Mr. Acquah concluded.

“The future holds potential for a stronger banking sector capable of underpinning a robust and resilient Ghanaian economy.”