Credit to private sector slows amid declining NPLs…expert says banks are still cautious

It appears the private sector is still not seen in favourable light by banks as data from the Bank of Ghana show credit to the sector is declining even though its share of Non-Performing Loans (NPLs) is also reducing.

According to the Banking Sector Report (January 2020), despite the private sector constituting larger proportion of credit advanced by banks, it’s share, however, declined to 87.1 percent in December 2019 from 91.4 percent the previous year. Meanwhile, the share of public sector credit accordingly increased to 12.9 percent from 8.6 percent during the review period.

This also reflected in declines of loans advanced to households and private enterprises as the report says, the share of credit to private enterprises declined to 63.8 percent from 66.3 percent while the share of household credit dipped to 20.8 percent from 22.9 percent over the same comparative period.

That notwithstanding, the share of private sector NPLs portfolio of the banks, has also shown signs of decline within the same period, even though it continues to account for the highest proportion of NPLs in the industry. Its share in total banking industry NPLs declined marginally to 96.7 percent in December 2019 from 97.1 percent.

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But commenting on this in an interview with the B&FT, a former banker and a risk management consultant, Francis Owusu Acheampong, said it is not automatic that a decline in NPLs will lead to more lending to the private sector as other factors are also considered before loans are advanced.

“It must be predicated on prospects in the economy and the NPLs is just one of such factors. So it is good that it has been reducing. But then what about the other factors – interest rate, exchange rate, attitude of borrowers – all of these come into the decision of banks to expand their loan portfolio,” he said.

It is not automatic that if NPLs are reducing, banks will expand their loan portfolio. The appetite for expanding loans is predicated on several factors for which the NPL is just one. It is the outlook which determines the banks’ appetite to expand the loan book. What are the prospects for lending?

He further stated that what matters most is the prospects that banks perceive about the economy and performance of the private sector.

“And if you don’t see those prospects improving, you just don’t just go and overblow your risk appetite. So for me, I think that is why collectively banks appear to be adopting a cautious approach. It shows how everybody is trying to strengthen their balance sheet,” he said.

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He however, expressed upbeat about the future, saying, banks will loosen their credit stance as the economy seems to be taking shape gradually.

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