The banking sector continues to see elevated risks to asset quality as a result of repayment challenges from borrowers. However, the sector remains well-positioned to continue managing the growing risk.

Notably, the factors that broadly ensure banks’ ability to better manage the risks include, BoG’s policy support and regulatory reliefs as well as banks’ increased capitalization.

The economic effects of the Covid-19 pandemic warranted the provision of reliefs to borrowers in the form of loan restructuring and loan repayment moratoria. While contributing to reducing the pandemic’s effect on businesses and households, loan defaults have since increased, thus, leading to higher non-performing loans (NPLs).

It is highly probable that this increase in loan defaults in February indicates that households and businesses still bear the brunt of the COVID-19 pandemic. Therefore, the repayment capacity of households and businesses have weakened as a result of the slowdown in economic activities. Obviously, the gradual improvement in economic activities in the first two months of this year would not abruptly improve the repayment capacity of households and businesses.

The dynamics of Banks’ NPL ratio

Recent data from the Bank of Ghana indicate that NPLs are still in their double digits. On a year-on-year basis, NPLs increased by 1.0 percentage points between February 2020 and February 2021. Compared to January 2021 NPLs saw a marginal increase to 15.3 percent from 14.8 percent.

Similarly, by excluding fully provisioned loans, the sector’s adjusted NPL ratio increased from 6.5 percent in December 2020 to 6.6 percent in February 2021. This means that banks’ NPL ratio could be reduced to single digits through writing off bad loans.

According to the Bank of Ghana, 9% of banking sector loans were restructured in 2020. This is fairly low as compared to the proportion of loan restructured in other African economies; restructured loans of banks in Kenya was 29% of total loans portfolio, while about 46% of total loans portfolio were restructured in Uganda.

Moreover, the banking sector development report by the BoG, showed a rise in NPL ratio from February 2020 to February 2021. This reflects an increase in the stock of NPLs by 15.1 percent to GH¢7.3 billion at end-February 2021.

On this account, banks wrote-off bad loans in excess of GHS 384 million in January and February 2021. Thus, reflecting a rise in bad loans compared with the same period last year at GHS225 million.

“Overall, the increase in the NPL ratio reflected in all but the agriculture, forestry and fishing, transport, storage and communications, mining and quarrying, and the services sectors, the Bank of Ghana revealed.

Sectors such as the construction sector recorded the highest in NPL ratio from 14.8 percent to 24.4 percent. Others such as the electricity, gas and water, manufacturing and the commerce and finance sectors saw only moderate increase in NPL ratios in February 2021.

The BoG remarked that: “Looking ahead, the banking sector remains well-positioned to continue with its core business of financial intermediation to support the on-going recovery process.”