As the volume of Non-Performing Loans (NPLs) increase due to bad investments made by banks, the Bank of Ghana (BoG) has revealed that it has in certain circumstances allowed banks to breach the single obligor limit to maintain financial stability.
The move which is seen as contradiction to some financial regulations is partially blamed for the high level of debt being recorded in the energy sector where the Volta River Authority (VRA) is indebted to 13 local banks to the tune of GHS4.4 billion.
According to the BoG laws, commercial banks are not permitted to advance loans to individuals or entities above a certain ceiling to prevent funds from being locked up.
By this, the single obligor limit protects the banking system from collapse by placing a cap on how much funds can be advanced to individuals and entities to allow liquidity flow in the financial system.
Speaking on the Citi Breakfast Show with Bernard Avle, the Director of Communication at the BoG, Bernard Otabil maintained that “when a bank is allowed to breach the single obligor limit it is actually done in conjunction with the Bank of Ghana, like specifically in the VRA case”.
He explained that it is in the powers of the central bank to make exemptions to allow some banks go beyond the limit to maintain financial stability.
“The banking supervision and the kind of stringent activities that go on there, you cannot imagine that the banks would deliberately try, as it were to hide some of these things from the central bank, the main preoccupation of the central bank is financial stability,” he stressed.
Panic over increasing NPL
Mr. Otabil’s comments come after government recently announced measures to restructure the Volta River Authority’s indebtedness of 4.4 billion cedis to 13 local banks.
The banks include Ecobank, Stanchart, Unibank, Zenith bank, GT bank, UBA, UMB, CAL bank, ACCESS bank, Stanbic bank, Fidelity bank, First Atlantic bank ,Ghana International bank among others.
In addition, the inability of one of Ghana’s biggest commodity trading companies Finatrade to meet its financial obligations of paying a one billion cedis loan it secured from 26 local banks in the country is also said to be crippling the banking sector.
The development has raised concerns about the safety of the banking system as banks record huge Non Performing Loans.
BoG allays fears
However, allaying the fears, Mr. Otabil maintained that the central bank is on top of the issues reengaging the banks to enhance stability.
He stated that it is rather the prudential control of the BoG that has brought the issues out and not as though the central bank is being reactive.
“It is actually the work of the BoG that has brought these issues to the fore. And the issues are that in basic accounting terms do not over estimate your profit and provide all known and anticipated losses, it is a mark of prudent and this type of prudential control is what the bank is introducing,” he argued.
Reacting specifically to the one billion loan of Finitrade, Mr. Otabil maintained that the BoG records all the various NPLs, whether isolated or captured as a single statement.
He stated that the BoG is already working on restructuring some of the activities to ascertain which loans will be classified as completely non-recoverable loans.
“If the banks are exposed and they are able to cover some of the exposure that then means we will have to do reclassification,” he said.
He stated that the central bank is not just interested in loans that have arisen because it allowed some banks to go beyond the single obligor limit but bad loans in total.
By: Lawrence Segebfia/citibusinessnews.com/ Ghana