CORONANOMICS: BoG directive frees extra GH¢3.6bn for lending

…but gov’t action needed to keep economy active

Some GH¢3.6billion has been released as extra funds into the banking system for on-lending to individuals and businesses as a result of the central bank’s Coronavirus (COVID-19) directive that saw the relaxation of some of its criteria, a Moody’s analysis has shown.

The BoG, 10 days ago, announced a reduction in its monetary policy rate to 14.5 percent from 16 percent tohelp increase credit growth in the economy. In addition to this, it also reduced its Primary Reserve Requirement from 10 percent to 8 percent; and reduced its Capital Conservation Buffer (CCB) for banks from 3 percent to 1.5 percent.

A breakdown of the changes and their impacts shows that the reduction in primary reserve requirement for banks to 8 percent from 10 percent, which will help banks improve their liquidity and increase lending to key sectors, will free up approximately GH¢1.6billion from a total deposit base of GH¢83.46billion as at December 2019.

“This will limit any liquidity stress on the banks and enable them to deploy funds to affected households and business, particularly small and mid-size enterprises (SMEs),” Moody’s said.

A reduction in the capital conservation buffer to 1.5 percent from 3 percent will further increase banks’ lending capacity, with Moody’s noting that it could release around GH¢1-2billion of capital and will protect, at least temporarily, banks from potentially higher credit losses as a consequence of the coronavirus-related asset quality effect.

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“In fact, the reduction in the countercyclical buffer will provide banks with greater flexibility to extend credit to viable customers suffering from short-term disruptions, and help preserve the overall quality of banks’ loan books,” the statement added.

Gov’t action required urgently

But the ratings agency noted that the extent to which banks deploy funds will likely depend on whether the authorities also provide other incentives: such as guarantees and supported lending schemes targetted on affected borrowers.

Impact of COVID-19 on banking sector

With slower economic activity likely, particularly during the first half of the year because of the disruption in economic activity triggered by lower consumption and business activity and stricter travel and quarantine policies, Moody’s believes this could lead to asset quality and profitability challenges for banks because of weaker lending activity, fewer fee-generating transactions and the higher cost of credit as asset quality likely weakens.

“We expect the measures from the central bank to somewhat mitigate the aforementioned negative impacts of the coronavirus outbreak on banks, because they will increase banks’ liquidity and capital available to lend in support of economic growth.

“In addition, they will provide some relief to banks’ income statements by reducing certain provisioning requirements and improving usability of mobile and digital payments channels,” it added.

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The central bank directive also included a reduction in provisioning for ‘Other Loans Especially Mentioned’ category to 5 percent from 10 percent, which are loans that banks consider as having deviated from prudent lending practices; and classify as ‘current’ loan repayments for microfinance institutions that are past due for up to 30 days.

To Moody’s, while these measures will give banks flexibility to support affected borrowers whose income is affected by the economic disruption, if sustained for an extended period the measures will impede the quality of financial reporting and affect financial stability because of inadequate provisioning.

“There are measures to promote the use of and make improvements to the mobile and digital payments network. These steps will help limit spread of the coronavirus more immediately, and longer-term will help banks reduce their costs as they leverage alternative distribution channels.”

The Bank of Ghana also halted banks from declaring and paying dividends or making other distributions to shareholders for the 2019 financial year – unless it is satisfied that the institution meets the regular prudential requirements and is not relying on additional liquidity released by the policy measures enumerated above to pay shareholders.

Again, the directive says banks and SDIs are to desist from utilising the released liquidity, based on the above policy interventions, to purchase government of Ghana and Bank of Ghana Securities.

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