The recovery in Ghana’s economy gained momentum last year with a strong improvement in most economic indicators but the banking sector’s exposure to credit was slightly elevated.
According to the Bank of Ghana (BoG), this was due to the lingering adverse impact of COVID-19 on borrowers’ capacity to repay their loans.
At the same time, asset quality risks increased last year compared to 2020 which was attributed to repayment challenges associated with the COVID-19 pandemic as well as some bank-specific loan recovery challenges.
Consequently, the Non-Performing Loans (NPL) ratio increased from 14.8 percent in December 2020 to 15.2 percent in December 2021. The regulator of the sector explained that this was attributed to the combined effect of an increase in the stock of NPLs by 16.0 percent to GH¢8.2 billion, as well as a modest growth in the stock of gross loans by 12.6 percent over the period.
The adjusted NPL ratio (excluding the fully provisioned loan loss category) however, improved to 5.8 percent from 6.5 percent in the previous year. According to the BoG, this was an indication that the increase in the NPL ratio was due to a build-up of loss category loans. Both the private and public sectors experienced a rise in NPLs ratio last year.
“The rise in the NPL ratio was mainly driven by a marginal increase in the private sector NPL ratio from 15.9 percent in December 2020 to 16.2 percent in December 2021, while the public sector NPL ratio increased from 3.3 percent to 6.1 percent over the same period”.
Bank of Ghana
NPLs by Sector
The BoG provided details on the composition of NPLs among the three major sectors of the economy; services, industry, and agriculture. According to the Bank of Ghana, the increase in the industry NPL ratio reflected mainly in the construction; agriculture, forestry and fishing; transport, storage and communication; and the commerce and finance sectors.
The NPL ratio of the construction and the agriculture, forestry and fishing sectors increased by 12.7 percentage points and 9.2 percentage points to 35.2 percent and 29.0 percent, respectively, during the review period.
The NPL ratio of the commerce and finance sector increased by 2.9 percentage points to 20.3 percent, respectively, during the review period.
Additionally, the transport, storage and communication sector recorded an increase in its NPL ratio by 6.0 percentage points to 13.7 percent over the same comparative period.
The Bank of Ghana disclosed that all other economic sectors recorded declines in the NPL ratios during the review period with the greatest improvement in the quality of the loan portfolio attributed to the electricity, water and gas sector.
Credit Portfolio Analysis
The stock of gross loans and advances amounted to GH¢53.9 billion at end-year 2021, representing an annual growth of 12.9 percent, compared to 5.8 percent growth in 2020. Private sector credit, which accounts for the biggest share of total credit (90% of total credit), recorded a marginal increase in growth from 10.6 percent to 11.5 percent during the review period.
Likewise, the Public Sector experienced significant improvement in credit growth contrary to the contraction in credit to this sector in 2020. Public sector credit increased by 27.1 percent in 2021 from a contraction of 27.0 percent in 2020. As a result, its share in total credit inched up to 10.0 percent from 8.9 percent during the same comparative period.
In terms of sector classification of credit allocation, the services sector held the largest share of 35.0 percent in total credit as at end-year 2021. This was followed by the commerce and finance sector and the manufacturing sectors with respective shares of 18.5 percent and 10.8 percent.
These three sectors therefore, accounted for 64.3 percent of total credit in 2021 compared with 61.9 percent in December 2020, according to BoG. The remaining share of 35.7 percent was distributed across five other economic sectors in various proportions. The mining and quarrying sector was the lowest recipient of industry credit with a share of 1.5 percent at end-year 2021, compared with a 2.5 percent share in the previous year.
Off-Balance Sheet Activities
Data from the Bank of Ghana show that banks recorded an increase in off-balance sheet transactions (comprising largely trade finance and guarantees) in 2021 relative to 2020. Total off-balance sheet transactions amounted to GH¢17.5 billion as at end-year 2021, representing a 39.6 percent annual growth, compared to the 11.7 percent growth a year ago.
Accordingly, banks’ contingent liabilities as a percentage of total liabilities increased to 11.3 percent in 2021 from 9.6 percent in 2020. This development, BoG said, “reflected gradual recovery in economic activity and resumption of cross-border trading activities in 2021”.
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