Even as the 23 banks that have survived the Bank of Ghana’s restructuring of their industry plot how to profitably deploy their new capital, they remain haunted by their past misadventures. Going by the central bank’s prudential loan classification rules, up to 50 percent of the loans the commercial banking industry currently classifies as non-performing are in actual fact, bad, and need to be totally written off. As at September last year, the industry was sitting on about GHc8.4 billion in non-performing loans which means that between them, the banks have over GHc 4 billion on their books that the BoG wants written off.
Understandably, the affected banks are reluctant to do this even though the loans in question have largely been fully provided for already out of banks’ capital and their expected income streams are no longer added on to profits; actually writing off these loans may be the most realistic option but doing so effectively closes the door on recovering them and recouping both capital and income that the banks are loath to forgo permanently.
However the BoG is now looking to persuade the banks to write off those loans completely and thus complete the cleaning up of their respective balance sheets. This is because taking them off their balance sheets altogether would significantly reduce the affected banks loan books size and their non-performing loans ratios, thus giving them new impetus to book new loans out of their new equity capital. Currently, the industry’s weighted average NPL ratio is now barely 20 percent, down from a peak of 23 percent in April last year and it is still falling.
The BoG’s latest banking supervision policy initiative is part of its wider plan to resolve the industry’s inordinately high NPL overhang. The central bank is pointing to the implementation of IFRS (International Financial Reporting Standard) 9 to support its demand for full loan write-offs. This, among other things insists on full loan write-offs where there is no reasonable expectation of recovery.
Its implementation in the receivership processes for the nine indigenous banks that have been compulsorily liquidated since August 2017 is instructive in that it reveals that their capital deficits were much larger than originally envisaged because loan asset quality was heavily over stated by their original owners.
Indeed, there is still a distinct possibility that some of Ghana’s banks have deliberately under-provided for their non-performing loans which they are now being asked to write off, which would reveal the extent to which they were under-provided for. This is a major dis-incentive for guilty banks to obey the BoG’s recommendation.
Aside from full loan write offs, the BoG is engaged in promoting further improvements in the insolvency framework and enforcement of creditors rights, both of which are expected to improve the resolution of problem loans still on the books of the banks.
Importantly, even as it tries to help the banks resolve their own bad and doubtful loans portfolios, the BoG is also taking steps to ensure that it recovers its own lending to the banks, by enforcing collateralization of the Emergency Liquidity Assistance it has provided some of them. It is also seeking to monetize its holdings of resolution bonds issued by government to cover the capital deficits of the banks it has liquidated and merged into Consolidated Bank Ghana, by marketing them to an international bank.
By Toma Imirhe