{"id":349530,"date":"2017-08-31T10:02:10","date_gmt":"2017-08-31T10:02:10","guid":{"rendered":"http:\/\/citifmonline.com\/?p=349530"},"modified":"2017-11-10T12:35:22","modified_gmt":"2017-11-10T12:35:22","slug":"how-to-confront-non-performing-loans-crisis-in-ghana-article","status":"publish","type":"post","link":"https:\/\/citifmonline.com\/2017\/08\/how-to-confront-non-performing-loans-crisis-in-ghana-article\/","title":{"rendered":"How to confront non-performing-loans crisis in Ghana [Article]"},"content":{"rendered":"
There is an issue plaguing the banking sector which is slowly killing the economy of the country. Yes, I am talking about uncontrolled lending. It seems like the banks have lent relentlessly and this is causing them to accumulate a lot of Non-Performing Loans (NPLs).<\/p>\n
Loans are considered to be non-performing when they are equal to or greater than 90 days in arrears or where management believes a loss may be incurred.<\/p>\n
Ghana is right now in a dire need to revive private investment. In face of such a crisis, when the country has GH\u00a27.96 billion stressed assets at the end of end of June 2017, things are definitely serious.<\/p>\n
The ratio of NPLs to total gross loans (NPL ratio) experienced an increasing trend between 2007 and 2010 from 6.37 per cent to 18.08 per cent and declined to 11.27 per cent in 2014 and thereafter increased to 17.70 per cent in 2016 and 21.2 percent in June 2017.<\/p>\n
High NPL ratios in Ghana have considerable and wide-ranging impacts; for both banks and society at large.<\/p>\n
For banks, NPLs tie up part of their capital base without providing a commensurate return, reducing profitability and increasing capital requirements (NPLs have a \u2018risk weight\u2019 of 150 percent under the Basel 3 Standardized Method).<\/p>\n
For Ghanaian society, a banking system which is not firing on all cylinders, due to the drag of NPLs, does not have the capacity to drive net new lending (in particular to SMEs). This constrains economic growth and disrupts the functioning of the monetary policy transmission mechanism (from the central bank to real-economy borrowers).<\/p>\n
Enhanced prudential oversight (\u201ctouch love\u201d)<\/em>.<\/p>\n Despite the Asset Quality Review launched in 2016, little has been achieved in resolving the underlying assets to which banks had lent because most of the assets still suffer from very high levels of bank debt. Similar to Viral Acharya\u00a0(Deputy Governor of Reserve Bank of India), I am proposing a \u201ctough love\u201d style approach towards the banks from now onwards. This is because this \u201ctough love\u201d measures will work towards the benefit of the banks but since the banks have been reckless towards lending in the past, such \u201ctough love\u201d measures will include the Bank of Ghana taking up the role of the parent that will put some additional regulations such as mandatory write off and time-bound restructuring targets on banks\u2019 NPL portfolios. In addition, Bank of Ghana should enforce the following provision under the Specialised Deposit-Taking Institutions (SDIs) Act, 2016 (Act 930) with no mercy:<\/p>\n For defaulters, some of the \u201ctough love\u201d measures I will recommend include<\/p>\n b. Reforms to enhance debt enforcement regimes <\/em>and insolvency frameworks<\/em>. Effective out-of-court restructuring frameworks and improved access to debtor information should be encouraged.<\/p>\n One issue I see with the above guidance is the possibility of duplication of registration and disjointed records that emanates with the absence of harmonization between the Collateral Registry and other registries such as the Company\u2019s Registry, the Lands Commission and the Driver and Vehicle Licensing Authority (DVLA). Accordingly, authorities should consider to centralize Collateral registry with land tile and other registration\u00a0so you have one spot for perfection of collateral.<\/p>\n c. Development of distressed debt markets <\/em>by improving market infrastructure and, in some cases, using asset management companies (AMCs) to jump-start the market.<\/p>\n a.Trends of NPL in Ghana<\/strong><\/p>\n <\/p>\n Source: Bank of Ghana Financial Stability Reports and Banking sector Reports<\/p>\n The graph below shows that NPL as a ratio of GDP is on the rise.<\/p>\n <\/p>\n Despite the passage of Borrowers and Lenders Act, 2008 (Act 773) [3] and the Credit Reporting Act, 2007 (Act 726) which resulted in the establishment of credit reference bureaus and collateral registry, NPL continue to grow.<\/p>\n The stock of NPLs stood at GH\u00a26.2 billion as at end-December 2016, expanding at a compound annual growth rate (CAGR) of 41.89 per cent from GH\u00a20.26 billion by end-December 2007. By the end of June 2017, the stock of NPLs in the banking industry had risen to GH\u00a27.96 billion from GH\u00a26.09 billion in June 2016. The ratio of NPLs to total gross loans (NPL ratio) experienced an increasing trend between 2007 and 2010 from 6.37 per cent to 18.08 per cent and declined to 11.27 per cent in 2014 and thereafter increased to 17.70 per cent in 2016 and 21.2 percent in June 2017. The NPL ratio reduction from 2011 to 2014 was due mainly to an upsurge in new loans disbursed (i.e. increase in gross new loans) and not because of a reduction in the stock of NPLs.<\/p>\n Although in Ghana, the Borrowers and Lender Act 2008, Act 773, allows banks and other financial institutions to takeover collateral used in securitizing loans without going through the rigors of court, several loopholes have seen debtors\u2019 slow banks down in taking over properties or securities. The authority from the Collateral Registry to grant a lender a lender to take over the property presupposes two things:<\/p>\n The trick adopted by some borrowers is to sue the bank on some issue e.g. contest the quantum of the loan amount indicated in the demand letter. There can be no attachment or sale before the legal issues are decided by the courts.<\/p>\n Secondly, most mortgagors (especially if it\u2019s a third party\u2019s property) will go all out to make the takeover of the property difficult. Most banks to my knowledge take the safest route via the courts (section 33 (a) of Act 773[4])<\/p>\n b. The Distribution of Credit & NPLs by customer type<\/strong> is below<\/p>\n <\/p>\n Source: Bank of Ghana Financial Stability Reports and Banking sector Reports<\/p>\n The private sector, being the largest recipient of outstanding credit balances also accounted for the greatest proportion of banks\u2019 NPLs. The share of private sector NPLs to\u00a0 total NPLs increased from 87.3 percent in June 2016 to 94.9 percent in June 2017 while the proportion of banks\u2019 NPLs attributable to the public sector declined from 12.7 percent to 5.1 percent over the same period. The restructuring of the TOR and VRA debts accounted for the decline in the public sector\u2019s share of NPLs during the review period. Most private sector non-performing loans were debts of indigenous enterprises accounting for 77.2 percent of total NPLs in June 2017.<\/p>\n c. The sectoral Distribution of Credit & NPLs<\/strong> is below<\/p>\n <\/p>\n Source: Bank of Ghana Financial Stability Reports and Banking sector Reports<\/p>\n The three largest sectors in terms of outstanding credit balances, namely are: the Commerce & Finance sector, the Services and the Electricity sector and the Gas & Water sector, which together accounted for 63.6 percent of total NPLs in June 2017.<\/p>\n d. The proportion of NPL Loans ( Impaired) in Each Sector<\/strong><\/p>\n <\/p>\n Source: Bank of Ghana Financial Stability Reports and Banking sector Reports<\/p>\n The Agriculture, Forestry & Fishing sector was however the sector with the highest proportion of its loans (39.3 percent) being classified as non-performing as at end-June 2017. It was followed closely by the Commerce & Finance Sector with a sectoral NPL ratio of 30.3 percent.<\/p>\n e. NPL ratio among Banks in Ghana <\/strong><\/p>\n <\/p>\n The focus of the analysis was to show Q2 2017 versus Q2 2016. For Banks that do have interim 2017 financial statements available on the internet, their Q4 2016 NPL ratios are shown instead.<\/p>\n The 2016 full year & 2017 half yearly financial statements for the following banks were not available on line to be used for the analysis : GN Bank Limited, National Investment Bank Ltd, Prudential Bank Limited, Stanbic Bank Ghana Ltd and The Beige Bank Limited.\u00a0 The following Banks were new and therefore have insignificant NPL ratios: The Royal Bank Limited, Heritage Bank Limited, The Construction Bank (Gh.) Limited, First National Bank Ghana Ltd.<\/p>\n If one bank displays a higher level of non-performing assets than another bank during a year, this does not necessarily mean that the first bank experienced a higher level of credit losses during the year. This may be because the first bank\u2019s non-performing assets were highly collateralized than other types of lending. Alternatively, the second bank may simply have written off its non-performing assets more quickly than the first bank, in an attempt to display a healthier loan book to investors and ratings agencies.<\/p>\n In some countries, public-sector banks are more exposed to NPLs than Private-sector Banks because public-sector banks\u2019 portfolios tend to lean toward infrastructure, real estate and telecom, which become significantly hampered during economic downturns. As well, in these countries, private-sector banks are considered to be more vigilant and prudent in their credit appraisal, risk management and loan recovery practices. This trend is however not exhibited among Banks in Ghana since both private and public-sector Banks exhibit high NPL. Suffice to say the Bank with the highest NPL at the end of Q2 2017 was Standard Chartered Bank Ghana Limited, a private sector Bank.<\/p>\n <\/p>\n Using different country samples, all recent studies find that higher NPLs tend to reduce the credit-to-GDP ratio and GDP growth, while increasing unemployment. This is consistent with the data from Bank of Ghana Financial Stability Reports and Banking sector Reports and Ghana statistical service.<\/p>\n <\/p>\n a.Prudential supervision <\/strong><\/p>\n b. Legal Obstacles<\/strong><\/p>\n c. No secondary market for distressed debts in Ghana <\/strong><\/p>\n d. Informational obstacles<\/strong><\/p>\n e. Lack of debt counseling is another common problem<\/strong><\/p>\n International experience prior to the global financial crisis as well as recent European experience suggests that a comprehensive strategy is most effective in resolving NPLs (Hagan and others 2003; Liu and Rosenberg 2013). Such a strategy typically includes three crucial elements:<\/p>\n (1) Tightened supervisory policies,<\/p>\n (2) Insolvency reforms, and<\/p>\n (3) The development of a distressed debt market.<\/p>\n a.Supervisory policies<\/strong><\/p>\n – Pursue a conservative application of accounting standards for impaired asset <\/strong>In particular, a supervisory policy should be introduced that underscores the importance of timely uncollectible loan write-offs before having exhausted all legal means to collect the debt. Time-bound write-off requirements for uncollectible loans could also be considered within the confines of Act 930. With regard to interest accrual practices, the adoption, for prudential purposes, of a nonaccrual principle for loans past a set delinquency threshold would be critical.<\/p>\n – Ensure that banks apply a conservative approach to collateral valuation<\/strong>. While it is reasonable to take account of collateral in provisioning, a conservative approach should be adopted, reflecting various constraints in valuing, accessing, and disposing of collateral. In particular, the value of collateral should reflect changes in market conditions, the costs of sale, and delays in realizing proceeds etc. Furthermore, collateral should be periodically valued by reliable and independent third parties and subject to enhanced supervisory scrutiny. In the case of real estate, banks should obtain<\/p>\n sound appraisals of the current fair value of the collateral from qualified professionals.<\/p>\n ii.Augment out-of-court frameworks with hybrid features. <\/em>International practice suggests that out of- court debt restructuring generates more rapid and cost-effective results, especially if the restructuring occurs against the backdrop of strong insolvency procedures. Out-of-court frameworks that use hybrid and enhanced features, such as a stay on creditor actions, majority voting, mediation or arbitration, or a coordinating committee, achieve the best results.<\/p>\n iii. Strengthen debt enforcement and foreclosure processes. <\/em>Enforcement and foreclosure processes should be simplified and streamlined (for example, to clearly specify enforceable titles, limit appeals, set short preclusive deadlines) to enable a swift process. Out-of-court enforcement and foreclosure should be considered where appropriate.<\/p>\n c. External NPL management and distressed debt markets<\/strong><\/p>\n d. Support measures<\/strong><\/p>\n The three-pillared strategy described above should be underpinned by support measures that cut across pillars, such as improving access to information and reforming tax regimes.<\/p>\n Reducing the level of impaired assets is essential for restoring the health of the banking sector and supporting credit growth in Ghana. <\/strong>High NPLs hold back credit supply by locking up capital that could be used to support fresh lending. And low write-off rates hinder necessary corporate restructuring and prolong the debt overhang, depressing credit demand. Given that impediments to NPL resolution are often interlinked, a comprehensive strategy is needed to address the NPL problem. Based on international experience, such a strategy should be based on three key pillars: (1) enhanced supervision, (2) insolvency reforms, and (3) the development of a distressed debt market.<\/p>\n <\/p>\n <\/p>\n References<\/strong><\/p>\n \u00a0<\/strong>1.Bank of Ghana- Financial Stability Reports and Banking Sector Reports<\/p>\n https:\/\/www.bog.gov.gh\/privatecontent\/MPC_Press_Releases\/Banking%20Sector%20Report%20%20-%20July%202017.pdf<\/p>\n 2.Ghana statistical service- Provisional Annual GDP(2016) April 2017 Edition<\/p>\n http:\/\/www.statsghana.gov.gh\/gdp_bulletin.html<\/p>\n 3.Strategy for resolving Europe\u2019s Problem loans- https:\/\/www.imf.org\/external\/pubs\/ft\/sdn\/2015\/sdn1519.pdf<\/p>\n 4.Non-performing loans in the Banking Union: stocktaking and challenges<\/p>\n http:\/\/www.europarl.europa.eu\/RegData\/etudes\/BRIE\/2016\/574400\/IPOL_BRI(2016)574400_EN.pdf<\/p>\n 5..Two Approaches to Resolving Nonperforming Assets During Financial Crises<\/p>\n https:\/\/www.imf.org\/external\/pubs\/ft\/wp\/2000\/wp0033.pdf<\/p>\n 6.Maximising Value of Non-Performing Assets<\/p>\n https:\/\/www.oecd.org\/daf\/ca\/corporategovernanceprinciples\/33962292.pdf<\/p>\n 7.Tough love for bad debt? RBI deputy targets Indian banks’ toxic loans<\/p>\n http:\/\/www.reuters.com\/article\/us-india-cenbank-deputy-idUKKBN1682U6<\/p>\n http:\/\/www.reuters.com\/article\/us-india-cenbank-deputy-factbox-idUKKBN1682UK<\/p>\n 8.Basel Committee on Banking Supervision (BCBS) guidance on the prudential treatment of problem assets – definitions of non-performing exposures (NPEs) and forbearance<\/p>\n http:\/\/www.bis.org\/bcbs\/publ\/d403.pdf<\/p>\n –<\/p>\n By:<\/strong> Emmanuel Akrong<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" Executive summary Banks in Ghana face significant challenges from their high levels of Non-Performing Loans (NPL) There is an issue plaguing the banking sector which is slowly killing the economy of the country. Yes, I am talking about uncontrolled lending. It seems like the banks have lent relentlessly and this is causing them to accumulate […]<\/p>\n","protected":false},"author":14,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[32,374],"tags":[3,1569,10715],"yoast_head":"\n\n
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