The Bank of Ghana, BoG, has introduced a new benchmark interest rate to serve as guidance for commercial banks in the country to set their lending rates.
The new Ghana Reference Rate, GRR, which will be reset every month has been commenced at 16.82%, effective for April.
The GRR, which has been devised by the BoG in close collaboration with the Ghana Association of Bankers, will replace the pricing model hitherto used by the banks to set their respective base lending rates, which is the rate at which each bank lends to its most favoured customers.
Under the new model, effective immediately, each bank will place a risk premium on the GRR in setting their lending rate for each loan given, the size of which will depend on its assessment of the risk associated with the loan.
The newly introduced benchmark rate will expectedly guide banks in the anticipated base lending rate cuts they will now make in response to the 200 basis points cut in the Monetary Policy Rate, MPR, made by the BoG’s Monetary Policy Committee, MPC, a fortnight ago.
The initial GRR is 118 basis points lower than the current MPR which has been slashed to 18%, its lowest level in 36 months. BoG is hoping that it will further encourage the banks to lower their lending rates in the wake of the most recent MPR cut.
Although the central bank has lowered the MPR from a long term high of 26% to 18% over the past 15 months, commercial banks have failed to match this with commensurate reductions in their respective base lending rates.
Indeed, over the one year period up to February this year, the average base lending rate has only fallen by 240 basis points, well short of the 300 basis points reduction in the MPR over the same period.
The Governor of the BoG has blamed this on policy transmission lags as banks have had to allow their existing relatively high fixed deposit contracts entered into with their depositing customers to expire before they can lower their cost of funds by negotiating lower deposit rates, which in turn can allow them to lower their lending rates.
However, the new GRR is computed using a greater focus on credit risk assessment rather than cost of funds and thus is expected to persuade banks to lower their lending rates at a faster pace in response to monetary easing by the BoG.
The new GRR for April is instructively 128 basis points lower than the lowest base lending rate charged in Ghana’s commercial banking industry as at February – 18.1 per cent charged by Barclays Bank – and 208.8 basis points lower than the highest, which is the 37.7 per cent charged by Unibank.
It is therefore expected that the new GRR will persuade banks to significantly lower their respective base lending rates over the coming days. However private sector chieftains fret that the new model may not influence actual effective lending rates since the banks are still allowed to devise their own risk premium over and above the GRR in computing how much they will charge on each loan.
Instructively, most banks charge effective lending rates that are between 50 and 200 basis points above their respective base lending rates, citing high credit risk as their rationale.
Indeed, the industry’s average non-performing loans, NPL, ratio is currently at a long term high of 21%, a situation which has lowered banking industry profitability and forced them to make hefty loan loss provisions that has eaten significantly into their capital.