Banks’ Asset Quality Pick Up

Dr. Ernest Addison

ASSET QUALITY of the banking sector improved due to a combination of both recoveries and further write-offs.

Total Non-Performing Loans (NPLs) contracted further by 4.5 per cent to GH¢6.33 billion in February 2020, following a decline of 14.4 per cent a year earlier. 

A report on the banking sector compiled by the Central Bank which made this known said the positive effect of the decline in the stock of NPLs on the NPL ratio was underpinned by the rebound in gross credit. 

This resulted in a decline in the NPL ratio to 13.8 per cent February 2020 from 18.2 per cent in February 2019.

Consequently, the industry’s NPL ratio adjusted for fully provisioned loan loss category also declined from 9.4 per cent to 5.2 per cent.

It said the distribution of NPLs among borrower groups reflected both the share of credits and the risk dynamics of these groups.

Accordingly, the higher share of private sector loans translated to a larger share of NPLs due to the generally higher risk profile of the private sector.

This also reflected in the sub-components of the private sector.

NPLs of indigenous enterprises accounted for almost three quarters of total NPLs, although banks halved credit to this segment due to their relatively higher credit risk.

Foreign enterprises, households or individuals, and government accounted for relatively lower respective shares of 9.2 per cent, 7.9 per cent and 2.7 per cent due to their lower credit allocation and better credit risk profiles.

The decline in the industry NPL ratio broadly reflected the trends in NPL ratios across the various sectors.

There was broad improvement in the NPL ratios across most of the sectors, except for mining & quarrying and the transportation, storage & communication sectors.

In particular, sectors with the highest NPL ratios in the industry recorded significant improvements in asset quality within the review period.

The NPL ratio declined from 42.3 per cent to 23.8 per cent for the electricity, water & gas sector and from 34.1 per cent to 23.6 per cent for the agricultural, forestry & fishing sector. While the transport, storage & communication, services and the mining & quarrying sectors recorded the lowest NPL ratios of 8.8 per cent, 9.2 per cent and 12.0 per cent respectively.

Looking ahead, it said the Covid-19 pandemic posed a major risk to asset quality.

“However, the recently announced policy measures could help moderate any potential deterioration in asset quality,” it mentioned.

Off-balance sheet transactions (largely comprising trade finance and guarantees) increased by 17.2 per cent in February 2020, compared to 8.1 per cent growth in February 2019.

Banks’ contingent liabilities of GH¢10.72 billion, however, constituted 9.7 per cent of total liabilities as at end-February, 2020, a decline from the share of 10.5 per cent in the previous year

BY Samuel Boadi

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