The latest credit conditions survey by the Bank of Ghana, as contained in its newly released Banking Sector Report, warns of an impending tightening of credit conditions by Ghana’s universal banks, as has been reported by the banks themselves.
This is bad news for corporate Ghana. During the first four months of this year, an easing of credit conditions, although not accompanied by a significant actual acceleration of loan portfolio expansion, gave hope that the reticence of banks to lend, which has accompanied their asset quality and solvency woes over the past couple of years, was becoming a thing of the past. Afterall, banks have recapitalized and have largely cleaned up their balance sheets. Besides, the operating environment for borrowers has improved significantly which means better likelihood of new loans being repaid as and when due.
However, it appears that the new capital put up by the banks, and the renewed growth in deposits, now that the confidence of the banking public has returned, is going more into investments in risk-free government domestic debt securities than into new credit to private enterprise. Over the 12 months up to April 2019, the share of the banking industry’s total assets held as loans has fallen by nearly 400 basis points to 34.4 percent while the share held as investments in securities has risen by some 450 basis points to 40.4 percent.
As usual banks will be blamed for being too conservative and for seeking easy profits. But that would not be fair.
During the recent banking industry crisis, banks were roundly blamed for being too cavalier with depositors’ funds, which they failed to protect. Thus, the industry has been blamed for forcing government to use taxpayers’ monies to bail them out just so depositors would not lose their savings and investments.
Now, the banks which have survived the meltdown – which were more prudent than those that have gone under – are simply playing safe, to make sure they do not repeat past mistakes.
Currently, these banks are being asked by their regulator, the BoG to write off billions of cedis in non-performing loans, in the wake of similar write-offs over the past couple of years. At the same time, government is regularly offering risk free securities of varying tenors, with yields of up to 22 percent. Even the shortest tenured, lowest yielding securities offer yields of over 13 percent, which is well above the average cost of funds of most, if not all the banks.
Thus, investing more into such securities rather than new loans is simple prudence.
However, while this is prudent for the banks, their depositors and even their shareholders, it is not doing the productive economy much good. The incumbent government’s economic expansionary strategy is predicated on private sector financing. However, the banks are not lending nearly enough and the stock market is of little use in raising new equity capital while share prices keep falling and investors consequently keep fleeing.
The only realistic way out of this is either to tempt banks with much wider margins from loans than from investment securities – which current yields on the latter will not allow for – or stop issuing those securities in sufficient quantities to keep the banks busy. Unfortunately, government’s predicament will not allow for this either.
This editorial does not pretend to offer a solution to this dilemma. But it must start from recognizing the true nature and cause of the problem.
