COVID-19 heightens debt repayment challenges for borrowers

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…as NPLs begin to inch up

Banks and other financial institutions face the risk of seeing their loan defaulters increase this year, as data from the Bank of Ghana shows the Non-Performing Loans (NPLs) have started rising due to the challenging business environment brought on by the coronavirus pandemic.

After declining to 14.3 percent in December 2019 from the 18.8 percent in March the same year, the Banking Sector Report (May 2020) shows the NPLs have inched up slightly to 14.5 percent at end of the first quarter this year – signalling more danger ahead as the real impact of the virus on businesses will be felt after first quarter, considering the country recorded its first case in mid-March.

Indigenous businesses have the highest NPL ratio of 17.5 percent while that of foreign enterprises stands at 16 percent. The public sector, on the other hand, has the least NPL ratio of 3.2 percent while the household sector’s share is 11.3 percent. This means, going forward, credit to the private sector will fall as banks will exercise extreme caution in advancing loans to, especially, the private sector in order to protect their balance sheet, even if credit demand goes up.

Banking consultant Dr. Richmond Atuahene accentuated this position in an interview with the B&FT, saying: “Definitely, the NPLs will go up; and that is why the Bank of Ghana instructed banks not to pay dividends – so that if they do have high NPL write-offs, it will not affect their capital.

“The simple reason is that productivity across the economy has slowed due to the pandemic, and so companies have seen revenues decline but expenses go up at the same time. So, how can such businesses pay back their loans to the banks if activities are slow? So it is not going to be easy this year for the businesses, and that will affect banks’ NPLs.”

The Bank of Ghana report also affirms the point that because businesses are severely impacted by the pandemic, loan repayments will become a challenge; hence, banks should implement prudent risk management policies to address this realistic challenge.

Banks, on the other hand, have started reacting by tightening their credit stance to enterprises and households in response to the challenging business environment, as a survey by the regulator shows gross loan advances growth contracted 0.8 percent in the first quarter of 2020 compared to 2.6 percent growth recorded the same period last year.

This, a former Deputy Managing Director (retired) – Finance and Administration at the Prudential Bank, Stephen Asare says, is a step in the right direction for banks to exercise caution in extending loans, considering the high default risk.

“If someone applies for a facility, the bank must do a risk analysis about what the person wants to use the loan for and which sector he operates in. Once that risk analysis is done and they see there is a problem in with customer’s ability to repay the loan, the bank ought to be very cautious.

“So there are some sectors in which it would be prudent to advance loans, and there are other sectors where the banks’ risk assessment will not make it prudent to advance loans. So it is proper for the banks to take a cautious stance for now, because the key issue is the customer’s ability to repay after taking the loan,” he told B&FT in an interview.

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