Despite concerted policy initiatives by both the Bank of Ghana and government itself to keep up lending by banks and other commercial lenders in the country, the universal banks are focusing on restructuring loans already on their respective loan books rather than booking new ones using the additional space given them by the central bank. Indeed, new ones are mainly those involving on-lending leveraging funds originating from government – such as the GHc600 million provided under the Coronavirus Alleviation Programme – and short term facilities and overdrafts given to their most loyal, most financially solid customers.
This is in line with deliberate strategies being applied all across Africa. Ecobank Transnational Incorporated’s chief executive, Ade Ayeyemi confirmed this last week at a global virtual event organized by Bloomberg. Although, data is not yet available to confirm this quantitatively, Instructively ETI’s Ghanaian subsidiary is Ghana’s biggest bank and smaller banks tend to follow the strategy leads of their bigger counterparts who they regard as better professionally endowed and more experienced than themselves. Indeed, privately senior bankers in Ghana admit to this strategy even as they publicly declare their willingness to support their customers financially through the trying times imposed on them by the COVID 19 outbreak.
Actually, the strategy adopted by Ghanaian banks was largely anticipated for several reasons. Firstly, the sheer uncertainties generated by COVID 19 and the necessary public policy responses to curb its spread are a deterrent to risk taking. Secondly the pandemic outbreak itself is having an obvious adverse impact on businesses in most sectors, the most notable exceptions however being ICT and healthcare. Thirdly, the 200 basis points reduction in both existing and new loans, agreed between government and the Ghana Association of Bankers has significantly narrowed spreads on loans, at a time perceived credit risk is rising. Meanwhile government’s inevitable increased appetite for fiscal deficit financing is making short and medium term treasury debt instruments readily available and at higher yields than over the previous couple of years.
This is all happening at a time when banks were just trying to recover from huge bad loan write-offs requiring new capital infusions and revenue write-downs during the period of financial sector reform between 2017 and the end of 2018.
Consequently banks are focusing on restructuring existing loans to keep up interest margins despite the compulsory 200 basis points cut in applicable lending rates and at the same time prevent them from becoming classified as sub-standard which would require a new round of capital provisions and write-downs of interest income. New monies from increases in deposits are being put primarily into short and medium term government treasury instruments, especially since longer term bonds have finally become attractive due to unprecedented liquidity and trading volumes on the Ghana Fixed Income Market which has made such investments liquid.
Actually, the BoG foresaw this possibility and consequently warned the banks that it would monitor their use of the extra lending space created by its monetary stimulus measures – such as reduction of the effective minimum capital adequacy ratio from 13.0 percent to 11.5 percent and a reduction in minimum reserves from 10 percent to 8.0 percent – and sanction those that used it for purposes other than lending to customers. However it is unclear how effective this monitoring has been and what the central bank aims to do about banks identified as using the opportunity to increase their investment portfolios rather than their loan books.