An assessment on the banking sector performance in 2020 indicates that loan loss provisions grew by 28.0 percent, higher than the 23.6 percent a year ago reflecting elevated credit risks in 2020.
A loan loss provision is basically a fund set aside by a bank to cover bad loans – the ones that do not get fully repaid because the customer defaults or those that provide less interest income because the borrower negotiated a lower rate. Loan loss provision is a bank’s best estimate of what percentage of a loan may not get paid back. Loan loss provisions are then added to the loan loss reserves, a balance sheet item that represents the total amount of loan losses subtracted from a company’s loans.
Surprisingly, this component which represents credit risk, grew by 28 percent, albeit the decline in the net credit that was made available to the private sectors. Specifically, data from the Bank of Ghana indicates that net credit to the private sector slowed to 5.8 percent in December 2020 compared with 23.8 percent in the corresponding period in 2019. And this is a matter of concern, as credit risk is higher in 2020 in the face of lower credit extension to the private sector.
According to the Monetary Policy Committee (MPC) report on the banking sector in 2020, it showed pliability to the first wave of the pandemic supported by strong policy support and regulatory reliefs, however, credit risk increased within the same time period. Banking sector performance remained strong through to end 2020, with robust growth in total assets, deposits and investments.
Driven ostensibly by the desire to encourage prudent bank management in Ghana and also to make the banking sector more resilient to shocks, and reposition the banks to better serve the Ghanaian economy’s growing financial needs, the Bank of Ghana presented in its report on the key indicators that signal the banking sector performance or otherwise. Amongst these indicators are profitability, liquidity, and solvency.
From the MPC report, all the performance indicators performed well, even though, they moderated as compared to 2019.
“Total assets in the banking sector increased by 15.8 percent of which investments in Government bonds rose by 33.4%. Solvency and liquidity indicators also remained strong. Capital Adequacy Ratio for the banking industry was 19.8 percent at the end of December which is higher than the minimum threshold.”
“Core liquid assets to short term liabilities were estimated at 27.8 percent in December 2020 compared with 30.5 percent a year ago. Net interest income grew by 20.9 percent to GH¢11.2 billion compared to 24.9 percent a year ago.”
“Operating income rose by 17.9 percent whilst operating expenses rose by 8.2 percent, albeit lower than the respective growth rates of 21.1 percent and 12.1 percent in 2019. Loan loss provisions grew by 28.0 percent, higher than the 23.6 percent a year ago.”
Monetary Policy Committee
High credit risk is conterminous to high performing loans which compromises the capital adequacy ratio – one of the major issues that resulted in the closure of some banks during the financial sector clean-up. Hence, it is imperative for the regulator to ensure that commercial banks find ingenious ways to minimize loan loss provisions.
Read also: Performance of Banking Sector Robust Despite COVID – BoG
