Parliament must consider legislation that would prevent guarantees of loans advanced to state-owned enterprises in the energy sector by government, Emmanuel Akrong – a credit consultant, has advocated.
The proposal, Mr. Akrong argues, will ensure the banking sector lends to only creditworthy institutions.
According to Emmanuel Akrong, over the years, banks in the country have taken “irresponsible” credit decisions, which saw several lending to SOEs that clearly had no means of paying back the contracted amount.
His comments come after government announced it will be raising GH¢10billion from the issuance of energy sector bonds to retire outstanding debts owed banks by various energy sector SOEs and Bulk Oil Distribution Companies (BDCs).
The indebtedness of the SOEs and BDCs to banks is largely blamed for prevailing high non-performing loans in the banking sector, which is currently is about 21 percent – meaning that for every one cedi given out as a loan, banks are unable to recover 21 pesewas.
But Mr. Akrong argued that energy-related SOEs and BDCs are not the problem or cause of default, and they are not cause of high non-performing loans (NPL) ratios among banks and the industry.
“In my view, many people point to symptoms of the problem and not the problem itself. It is true that the key risk to the banking industry is the high stock of impaired assets to total loans as measured by NPL ratio, of which energy-related SOEs and BDCs contribute to that number,” he said.
While there are several triggers of credit risks, Mr. Akrong said with the case of the SOEs and BDCs, in his view, the primary cause of default is the irresponsible credit decisions taken by some banks – although he acknowledges other possible triggers relating to economic conditions such as oil prices; government action to subsidise oil prices; and the inability of Tema Oil Refinery to raise sufficient working capital/letters of credit facilities to import oil, which in certain periods leads to almost-halted operating activities of TOR and others.
He stated all the energy-sector SOEs are in a precarious financial state, as banks advanced as much as US$2.4billion to them.
“Given their poor financial positions, why did some banks continue lending to energy-related SOE like TOR, Bulk Oil Storage and Transportation Co. Ltd. (BOST), Volta River Authority (VRA), Electricity Corporation of Ghana (ECG) and BDCs?
“Simply because they [banks] thought government would pay them if TOR, BOST, VRA and ECG did not pay. So, the normal factors that should be considered in approving credits were either not properly vetted or thrown out the window,” Mr. Akrong said in a paper analysing the IFRS 9 implications of the assumption made by Banks in Ghana regarding implied government guarantee of energy-related SOE and BDC debts.
“Some of these SOE were visibly bankrupt but banks kept lending to them, why? Because Father Christmas government of Ghana (GoG) would pay if those SOEs defaulted. Why would the Banks think that way? It is because the GoG in the past has done that,” he said citing the TOR Recovery Levy slapped on petroleum products to pay loans acquired by TOR from some banks.
Mr. Akrong stated that the one of the ways government can get out of this situation is to pass a law to explicitly say there is no implicit guarantee of SOE debts – especially the energy-related ones – and that banks are on their own when they lend to those SOEs.
“This has been done before in other countries. In 2001, government guarantees for savings banks in Germany were removed following a law-suit. What happened to that? It was found out that the removal of government guarantees resulted in a significant reduction of banks’ exposure to credit risk.
Exposure to credit risk decreased significantly more in banks for which the value of guarantees was higher ex ante. Savings banks shifted their portfolios toward safer borrowers by dropping existing borrowers with higher credit risk, and by tightening their lending standards for new borrowers. Loan sizes were reduced,” he argued.