Lending rates becoming more risk sensitive

Dr Ernest Addison, Governor, Bank of Ghana

Statistics from the Bank of Ghana suggest that in the face of long-term record high non- performing loans ratios, suffered by the country’s universal banks over the past year, the banks have become more risk sensitive than ever before in setting their lending rates. Currently, the non-performing loans ratio of Ghana’s banking industry as a whole stand at about 22%, slightly lower than the peak of 23.1% experienced at the turn of this year. This is still much higher than the decade long average of about 15%. While the non-performing loans ratio varies widely from one bank to another, the systemic risk incurred by all the banks through their participation on both the inter-bank market and the payments clearing house is forcing every bank to become more risk sensitive in setting rates.

Earlier this year

As at July this year, effective lending rates charged on average by universal banks in Ghana ranged between 15.11% and 39.86%, down from a range of 20.50% to 40.91% a year previously. Thus, while the upper end of the range has fallen by 105 basis points over the intervening 12-month period, the lower end of the range has declined by 539 basis points. The BoG’s data covers lending to agriculture, export trade, manufacturing, mining and quarrying, construction and what the central bank categorizes as “others”.

The data suggests that banks are willing to lower lending rates significantly in line with falling benchmark interest rates, in their lending to top tier customers regarded as least risky, but are refusing to significantly lower their lending rates for loans given to other borrowers, who they still regard as inordinately risky. This is despite a more than commensurate decline in their deposit costs.

Instructively, over the 12 months between July 2017 and July 2018, the average coupon interest rate offered by universal banks in Ghana on one-year fixed deposits has fallen from a range of 7.40% to 28.00% to a range of 2.00% to 22.00%. This translates to a decline in offered rates on    one-year deposits of some 600 basis points which is more than five times the reduction in effective lending rates on loans offered to most borrowing customers.

Indeed, only the most reliable borrowers – those with relatively large cashflows many of whom actually guarantee their loans with fixed deposits at lower rates – are benefitting substantially from the falling lending rates being indicated by the banks themselves through their respective base lending rate announcements. The wide range of effective lending rates being reported by the banks themselves indicates  just how risk sensitive they have become in setting their respective lending rates; banks now offer loans to borrowers perceived as low risk, at half the interest rates offered to customers regarded as more risky, even though they are engaged in the same type of business.

The benchmark Monetary Policy Rate has been cut by 400 basis points from 21% to 17% over this 12-month period, a decline that more or less matches the basis points drop in the interbank rate from 21.91% to 16.23%.

The refusal of universal banks to match the cuts in the MPR and in interbank rates with cuts in lending rates to most borrowers reflects their perception that lending risks have not been reduced over the past one year. Indeed the data reveals that interest rate spreads demanded by the banks are actually rising. Bank chieftains explain though that this is mainly because banks are seeking to restore their erstwhile profitability ratios which have been eroded significantly because of higher provisions demanded by industry regulators against bad and doubtful loans.

By Onajite Sefia