Non Performing Loans (NPLs) in the banking sector has risen to a six year high of 19.3 percent, reflecting the continued deterioration of the business operating environment, the Bank of Ghana figures have shown.
This means that for every GHC100 of loans granted by banks, about 19 cedis 30 pesewas is likely to go bad, lost or un-recovered.
According to the central bank, which finalized its periodic Monetary Policy Committee with a press conference on Monday, since January this year – when NPL declined marginally from 14.7 percent at the end of last year to 14.6 percent- the rate of non-performing loans has taken a northerly turn, going up consistently to 19.3 percent at the end of May when the central bank last reviewed the credit situation.
It also noted that the ability of the banking system to withstand shocks or unexpected losses as measured by the capital adequacy ratio has also reduced from 17.9 percent in January this year to 16.6 percent as at May ending, which makes the current NPL position a more worrying one ahead of the November polls.
Indeed, the last time NPLs crossed19 percent was in February 2010 when the rate reached 20 percent, which the then governor of the Bank of Ghana and the now the Vice President, Kwesi Bekoe Amissah Arthur attributed to energy loans that has had to be reclassified from the sub-standard to the loss category.
But the situation now has become a grave concern to regulators of the monetary policy regime, who have once again asked banks to limit their energy-related risks following revelations that a chuck of the bank’s credit is owned by firms in the energy sector.
Bank in response have also grown extremely wary of the entire economic system, which has forced them to cut back on loans granted, affecting businesses ability to access capital finance at a time alternative sources of funds are drying out with the performance of the stock market declining at a fast pace as investors have become more bearish due to weak macroeconomic fundamentals.
Recent hikes in taxes, fuel and utilities cost have also increased the cost of production of businesses and ate into their bottom line, with many firms now having to dip into their surplus accounts to meet operational expenses.
According to the central bank, NPL is now the key risk facing the banking sector with the asset quality deteriorating, which exposes weakness in operational efficiencies in banks.
As a result, banks have tightened the credit stance and the liquidity pressure is more pronounce for small and medium sized enterprises because of inadequate cash flows to support repayment, weak financial performance and inadequate securities.
More profitable firms are even complaining of a major pullback by banks, which many warn will be a setback to the country’s economic recovery programme under the watch of the International Monetary Fund by denying businesses credit.
It is even feared that the absence of credit may fuel a vicious circle in which businesses lack the funds to run their operations, leaving them unable to pay their debts.