Banks borrowed GH¢2.57bn from BoG in pandemic year

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Financial Institutions and Third-Party risk exposure management
  • A 195% increase from GH¢872.96m
  • Analysts blame COVID-19’s impact on businesses

Within a period of one year, liquidity support from the central bank to the banking industry increased by a whopping 193 percent, a situation analysts blame on the impact of the pandemic on businesses which led to increased demand for cash, hence, pushing banks to fall on the lender of last resort.

The Statistical Bulletin report (October 2020) released by the Bank of Ghana has shown that credit from the central bank to deposit money banks increased to GH¢2.57 billion in October 2020 from GH¢872.96 million in October 2019, representing 195 percentage points increment within the period. The data further reveals that liquidity support increased by GH¢1.5 billion between the months of June and October.

Commenting on this, risk management expert Francis Owusu-Achampong, told the B&FT in an interview that the increase in liquidity support, especially after the lockdown, just reveals how the coronavirus pandemic devastated the private sector and made it difficult for them to repay their loans, thereby, affecting the capital of banks. Hence, banks had no option than go to the regulator for liquidity support.

“Certainly, it is a reflection of the havoc caused by COVID-19. Customers’ businesses have been devastated by lockdown and general depression. Just imagine the effects COVID-19 has had on specific sectors like the hospitality, aviation, entertainment, shipping industries which traditionally are cash cows. With heavily reduced operations, other sectors that fed on these have similarly had diminishing prospects. The effect has been difficulties in meeting loan repayments.

This automatically leads to high impairment provisions which significantly impact Capital Adequacy Ratios. The liquidity support is designed to ameliorate diminishing capital before they hit insolvency levels and create systemic crises. Note also, that costs of production have risen significantly across board due to high human capital costs, accelerated IT and other business continuity measures in the wake of dwindling revenue streams,” he said.

Former banker and chartered accountant, Stephen Asare, also thinks similarly, saying the data does not mean the banking industry is in crisis; rather, it only reflects high demand for cash by businesses and households within the period under discussion.

“When it is getting to the last quarter, businesses have high demand for cash. The Bank of Ghana is the lender of last resort and so they come in temporarily to support the banks as and when needed. The data is just a reflection of businesses and households request for money. Banks are required by law to retain a certain portion of their deposits with Bank of Ghana.

And after depositing that money, banks must also have some in their vault to meet the withdrawal demands of customers. So if withdrawal demands increase and what you have in your vault is not enough, you can go to the central bank and ask for money. The liquidity support is usually not for the banks own use. It is driven by demand of customers of banks. So eventually that money oils the economy rather than impact on it negatively,” he said in an interview with the B&FT.

He however added that if the situation persists for a prolonged period of time, then it will suggest the banking industry is facing serious liquidity challenges which can affect the economy.

“If it becomes a constant demand from banks to go to the central bank for liquidity support for a prolonged period of time, that will signal that something is happening in the industry that could impact the economy negatively. But on the face of it, it doesn’t raise any alarm when Bank of Ghana provides liquidity support to banks temporarily,” he said.

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