Private sector to suffer as banks warn of further cuts in loans in 2017

Ghana’s private sector is set to experience further cuts in lending by commercial banks in the country heading into 2017. This is according to banking consultant Nana Otuo Acheampong.

Nana Otuo Acheampong predicts further cuts in lending by commercial banks to the general public and businesses.

Speaking to Citi Business News, Nana Otuo Acheampong who is also the Head of the Osei Tutu II Centre for Executive Education and Research maintained that banks will always look out for risk free securities to invest depositor’s funds as the economy plummets.

“You will still see a tightening of lending especially to the private sector. As you are aware lending by banks can go to one of two sources or both, one source is the private sector, the other is the public sector bank, and that include treasury bills,” he said.

He stated that banks may lend to the private sector but will restrict the level of investment  due to instability in the private sector.

“Let me say that even though they may continue to lend to the private sector, that will be restricted in that they know that the quality has to be better than it is now, so they will be very selective in lending,” he said.

His comments follows a warning from the regulator of Ghana’s banking industry, the Bank of Ghana calling on banks not to cut back credit to their customers.

“One thing the banks must be aware is that the bank of Ghana is not asking for the banks to lend on whole sale bases to the banks but they are rather asking them to lend on a reasonable bases. And there for they will have to close their risk assessment more strictly than before to ensure that any lending would be repaid. Because at the end of the day if any institution lends without the repayment coming in the eventual outcome is  the collapse of the institution.”

Non–performing loans on the books of banks in the country increased by 59.9 percent from GH¢ 3.1 billion in March 2015 to GH¢ 4.9 billion in March 2016.

The regulator of Ghana’s banking industry the Bank of Ghana has warned banks in the country against cutting back credit to their customers.

Majority of banks in the first quarter of 2016 begun cutting back credit to customers following a significant increase in Non–performing loans (NPLs).

As at March 2016, the sector comprised 29 banks, of which fourteen were domestically controlled.

The banks managed 1,173 branches and 912 Automated Teller Machines (ATMs) distributed across the ten regions of the country.

Non–performing loans on the books of banks in the country however increased by 59.9 percent from GH¢ 3.1 billion in March 2015 to GH¢ 4.9 billion in March 2016.

Though the Bank of Ghana has admitted the growing spate of nonperforming loans on the books of banks is the key risk facing the banking sector, even though generally the overall performance of the banking sector in the first quarter of 2016 remained strong, it fears the move will have adverse implications on their profitability.

Bank’s income dwindle

Interest from loans continue to be the main source of income for banks in Ghana, the second highest is from fees and commissions while the rest  is from investments including treasury bills, shares and other equities.

In March 2016, interest income constituted 49.8 percent of total income compared with 48 percent in March 2015.

However, the share of investment income in banks’ total income declined marginally from 32.6 percent in March 2015 to 32.3 percent in March 2016.

The share of income from fees and commission however remained unchanged at 11.4 percent in March 2016 compared with a year earlier.

But with the growing spate of bad loans on the books of banks they have been forced to cut credit to customers.

A lot of factors have been attributed to the increase in bad loans including the country’s economic challenges, the power crisis and increasing cost of production due to high utility tariffs.

These factors have forced companies a majority of them who are defaulters of the loans to be unable to pay back.

Defaulting customers

According to the central bank’s latest financial stability (May 2016) report credit to the private sector contributed 94 percent of the total banking sector’s non-performing loans as at March 2016, slightly down from 96.8 percent in March 2015.

Even though private enterprises received only 69.9 percent of the private sector credit, they accounted for 86.9 percent of NPLs as at March 2016.

The proportion of banks’ NPLs attributable to the public sector increased from 3.2 percent in March 2015 to 6.0 percent in March 2016.

The highly disproportionate level of NPLs associated with the private enterprises was driven mainly by indigenous enterprises, which received 60.9 percent of credit to private enterprises but accounted for 77.8 percent of NPLs as at March 2016.

Even though the share of foreign enterprises in total private sector credit declined from 12 percent in March 2015 to 9 percent in March 2016, its contribution to private sector NPLs increased from 7.8 percent to 9.2 percent during the review period.

Households’ share of private sector credit and contribution to NPLs declined over the review period.

Sectors pushing NPLs up

Commerce and finance sector continued to account for the largest amount of the banking sector NPLs followed by services, and agriculture, forestry and fishing.

The three sectors accounted for 72.6 percent of NPLs in March 2016 compared with 54 percent in March 2015.

Electricity, water and gas sector recorded the lowest NPL ratio during the review period.

Another move that has seen loans defaults on the book of banks to shoot up is the reclassification of the loan portfolio of banks .

The banks in a bid to deal with the troubling development have commenced cutting back credit to consumers.

BoG’s fears

But the central bank warns while a slowdown in credit delivery may moderate the accumulation of NPLs, it has adverse implications on the profitability of banks.

It argues that since credit delivery is the core business of banks the move will hurt their revenue and rather says banks must intensify their loan recovery efforts alongside tighter credit risk management practices in order to minimize losses from non-performing loans.

Banks profits dip

But the central bank’s fears have already started reflecting in the industry for example profitability Indicators of profitability for the banking industry showed some deterioration in banks’ earnings performance for the period ended March 2016.

The industry’s net interest income registered a growth of 14.8 percent in March 2016 compared with 37.3 percent growth registered in March 2015.

The sector’s income before tax registered a negative growth of 1.0 percent in March 2016 compared with a growth of 31.8 percent in March 2015.

Similarly, the industry’s net profit after tax contracted by 2.6 percent in March 2016 compared with 24 percent growth in March 2015.

The key risk facing the banking sector is the deteriorating asset quality as evidenced by the almost 60 percent increase in banks’ non-performance loans between March 2015 and March 2016

Profitability for 2016

Fast forward to 2016 first quarter and the story is no different.

According to the BoG’s financial stability report released in late June, 2016 which covers the first quarter of 2016 profitability Indicators of profitability for the banking industry showed some deterioration in banks’ earnings performance for the period ended March 2016.

The industry’s net interest income registered a growth of 14.8 percent in March 2016 compared with 37.3 percent growth registered in March 2015.

The sector’s income before tax registered a negative growth of 1.0 percent in March 2016 compared with a growth of 31.8 percent in March 2015.

Similarly, the industry’s net profit after tax contracted by 2.6 percent in March 2016 compared with 24 percent growth in March 2015.

By: Norvan Acquah – Hayford/citibusinessnews.com/Ghana