Falling interest rates won’t guarantee aggressive lending – Economist

Mr. Farid Antar, Managing Director-Republic Bank

Following the drop in the policy rate by the monetary policy committee of the Bank of Ghana (BoG), interest rates across the market have seen similar declines; however, this is not a guarantee for an aggressive push in lending to the private sector, Courage Kingsley Martey, Senior Analyst with Databank Research has said.

Since a steady reduction in the policy rate to 13.5 percent, all benchmark Interest rates have also fallen in line with the monetary policy rate (MPR). The BoG’s daily interest rate has consistently declined by 0.9 percent from 13.58 percent from the end of May 2021 to 12.68 percent as of July 01, 2021, whereas the 91-Day rate was at 12.24 percent as of Friday 28th June.

Further, the computed Ghana Reference rate (GRR) is expected to decline to 13 percent, aligning with the current market rates. Consistent with the market rates, the average commercial bank lending rate is currently about 21 percent.

“This is not enough to guarantee aggressive growth in lending. The banks must show an appetite for risk and a willingness to take on more risk. But what we see now appears like the banks are still averse to risk and are exercising significant caution – especially with the non-performing loans (NPLs) looking to rise, based on the latest MPC data,” Mr. Martey said in an interview with B&FT.

Some market analysts have indicated that while the economy seems to have withstood the impact of COVID-19 relatively well so far, there are some associated challenges that it has brought.

Key among these challenges is slower growth in the private sector credit – which is not only because the banks are investing in less risky assets, but also because of the crisis’ impact on business expectations and its scaring effect through heightened risk aversion in the business community and a limited appetite to undertake riskier investments.

According to the central bank, from beginning of the year to April 2021 new advances totalled GH¢10.5 billion – marginally lower than the advances of GH¢10.9billion during the same period of 2020.

Due to weakened demand conditions, and the substantial pay-down of debt – about GH¢36billion in 2020 and GH¢15billion during the first five months of 2021 – annual growth in private sector credit was 6.9 percent as of April 2021 compared with 17.9 percent recorded in April 2020.

Commenting on this, Mr. Martey said the low appetite of commercial banks to lend in these uncertain times goes beyond the reach of quantitative monetary policy, and may require the use of moral suasion and/or some form of credit guarantee to stimulate risk-taking by commercial banks.

However, the market anticipates that as economic activities rebound and lending rates drop further, it may lead to an increase in private sector credit.

Responding to the current lending situation and transitioning of the policy rate, Managing Director of Republic Bank, Mr. Farid Antar, in an interview with B&FT said: “It has a lot to do with composition of the GRR; the impact of the policy rate in the GRR is not the same. So, if it drops by a hundred basis points the GRR does not drop the same, it drops around 40 basis points”.

“Banks sometimes take a little time to implement, because we also have to match our liabilities to our assets. Not all (banks’ lending rate) can be reprised at the same time, but immediately after the GRR reduction all our loans tied to the GRR would have reduced. But if you want to see more significant movement, we go through the process of analysis and pricing because we have to look at our deposit rates,” he explained.

He added: “To encourage banks to do more, we need to get that infrastructure better. If I take the risk, I should be able to recover – and the court system should be able to facilitate that.

“I see lending improving, but there is also a heavy demand of liquidity from the government borrowing; so, there is a lot of balancing the equation as you still want to make returns for your stakeholders,” he said.

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