Energy bond will trigger drop in lending rates – bankers
Banks have given strong assurances that should the government’s US$2.5billion 15-year energy bond come off successfully, lending rates, which have persistently remained high despite a fall in several economic indicators, will fall sooner than expected.
Edward Botchway, Chief Financial Officer of Ecobank, told the B&FT in an interview that, since the energy sector-related debt and that of Bulk Oil Distribution Companies (BDCs) contribute significantly to high Non-Performing Loans (NPLs), settling those debts will significantly lead to a drop in NPLs and subsequent drop in lending rates.
“In an economy where the industry’s NPL is 19percent, it basically means that, for every GH¢100 loan a bank gives, GH¢19 is not paid back. In pricing these loans, one has to find a way to deal with that and all of that feeds into it.
There is also a part of this that is linked to debts that need to be paid by the BDCs and energy firms.
Once the BDCs and energy sector debts are all resolved, it will go into reducing NPLs and subsequently cost of credit. Giving more time and space, we will see reductions in lending rates,” he noted.
Mr. Botchway also noted that the good thing currently is that lending rates are trending in the right direction. “The government is taking the right step and the actions and efforts that have been put in place are moving us towards the right direction but we obviously need to continue and come to a resolution quickly and then the benefits of that will obviously follow.”
Frank Adu Jnr, Managing Director of CalBank is also of the opinion that the proposed energy bond will clean up the books of banks and provide enough liquidity for banks to continue lending.
Mr. Adu added that his bank made provisions for the BDC debt after the financial sector review in 2016 but CalBank’s capital adequacy ratio is still 19percent, which he pointed out means the bank is very well capitalised.
He added that the reason banks are not able to react immediately when the policy rate drops is because there is a process that must be followed. “The thing is, you cannot operate out of the market but as interest rates trend down, we are going to trend down; so far, the rates at which banks lend are falling, albeit, marginally.”
Since 2016, the major macroeconomic indicators have seen major downward movements, leading to calls for banks to follow suit by dropping, significantly, the rate at which they lend – which still hovers between 28 to 35percent.
Though banks’ lending rates are dropping, they are marginal compared to the drop in policy rate, inflation and Treasury Bills, According to data from the Central Bank, which covered 31 banks, the industry average lending rate as at May 31, 2017 was 26.6 percent, a marginal drop of 0.2 percent over the April rate of 26.8 percent.
In January, the average deposit rate was 11.9 percent, giving a year-to-date decrease of 0.7 percent. The data show that as at end of January 2017, the industry average base rate was 27.6 per cent, giving a year-to-date drop of 1 percent.
Inflation has dropped from a high of 19.2percent in March 2016 to 12.1percent in June 2017.
The Bank of Ghana’s policy rate has also dropped by 500 basis points from 26percent in October 2016 to 21percent in July 2017.
Government’s 91-day Treasury Bill, which was as high as 25percent in January 2016, has fallen drastically to 12.5percent as at July, 2017.
The local currency, which consistently depreciated in the first halves of 2013 to 2015, saw stability in 2016, with a marginal depreciation of 1percent in the first 10 months of 2016, and even though it lost about 7percent of its value in the first quarter of this year, it has recovered and rallying against the dollar.
Due to liquidity challenges banks are facing and coupled with high NPLs, the government has taken the decision to raise a onetime bond of US$2.5billion to clear the over US$4billion energy sector and BDC debt.
Documents seen by the B&FT show, at the end of last year, the net debt to banks and fuel suppliers amounted to US$1.3billion. State-owned power producer, the Volta River Authority (VRA) alone, owed the banks about US$782million.
The Finance Ministry in June selected Fidelity Bank and Standard Chartered Bank as lead arrangers for the bond issuance. As part of their duties, the banks are expected to work closely with members of their respective syndicates/consortia and any other local banks/ financial institutions as co-managers with the view to building capacity locally and facilitating knowledge transfer.