Demand for loans on the rise …but supply remains a major challenge

Individuals and businesses are asking for more bank loans as the recently introduced Ghana Reference Rate (GRR), a new formula for the calculation of lending rates, is helping push down interest on loans…but the banks are unable to keep up due to rising NPLs, among other factors.

Since introduction of the GRR in the second quarter of this year, the rate has seen a marginal decline from 16.82 percent in April to 16.74 percent in May.

Apart from impact of the GRR, a net easing in the credit stance of banks for loans to both enterprises and households as a result of the reduction in the Monetary Policy Rate (MPR), as well as improved expectations regarding the economy’s performance, can be attributed to the increased demand.

“Banks’ lending rates expectations recorded a decline of a 100 basis points to 22.9 percent compared with the February 2018 survey round. Introduction of the new Ghana Reference Rate (GRR) was the main reason banks attributed to the decline, explaining that the GRR is expected to drive lending rates down in the future,” the report noted.

The report, which covers April 2017 to 2018, shows an overall increment in demand for credit by both households and enterprises in the April 2018 survey round.

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“Despite the increase in overall demand for loans by enterprises, however, demand for long-term loans and SME loans dipped during the April 2018 survey round, relative to the February 2018 position. Demand for house purchase loans and consumer credit also went up during the most recent survey,” the report noted.

The supply decline

Even though demand has gone up, the supply side is still in decline due to several factors -including rising Non-Performing Loans.

The banking industry’s stock of gross loans and advances stood at GH¢36.75billion as at end April 2018, a reduction of 5.9percent year-on-year in real terms compared with the 3.1 percent growth of the same period last year.

Similarly, private sector credit (comprising loans to private enterprises and households) recorded a contraction by 2.7 percent in April 2018, compared with the 2.8 percent growth recorded in April 2017.

A bigger proportion of outstanding credit balances were attributed to the private sector in April 2018, the report noted.

The share of banks’ credit to the private sector increased from 86.3 percent in April 2017 to 89.3 percent in April 2018, while that attributed to the public sector declined from 13.7 percent to 10.7 percent within the same comparative period.

The NPL impact

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The stock of NPLs increased from GH¢7.15billion as at end-April 2017 to GH¢8.63billion in April 2018 – a new record high. Though the industry’s Capital Adequacy Ratio (CAR) – the main solvency indictor – remains well above the statutory requirement of 10 percent, the report noted that about a fifth of the banking industry’s loan portfolio was impaired or went bad between the period April 2017 and April 2018.

“The increase in NPLs reflected the migration of some legacy loans to the non-performing category. Industry-wide, the banks were solvent and liquid although signs of weaknesses remained. Asset quality continued to be a source of concern,” said the report.

The report pointed out that the private sector, with the bigger share of total credit compared with the public sector, accounted for the bulk of NPLs in the industry – though its share declined from 97.5 percent in April 2017 to 90.7 percent in April 2018, with the public sector’s share increasing from 2.5 percent to 9.3 percent over the same comparative period.

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