To discourage such practices going forward, the BoG is introducing a number of new regulations.
Firstly, from now on, the financial holding companies that own banks will not be allowed to borrow from their own bank subsidiaries to recapitalize themselves or any of their other subsidiaries. Indeed parent companies cannot take loans from any other bank in Ghana using a guarantee from its bank subsidiary, except where the loan is secured by dividend income from or service level agreements with that subsidiary bank.
If a parent financial holding company does take a credit facility from its subsidiary bank, then the loan would be regarded by the regulator as a return of capital and would thus be deducted from the capital of the lending subsidiary when computing the bank’s capital adequacy ratio. Similarly, if a bank lends to its sibling – a company owned by the same parent financial holding company – that loan would carry a full 100% risk weighting if secured with collateral, or deducted from the bank’s capital in computing its Capital Adequacy Ratio if the loan is unsecured.
Importantly, all such loans must be assessed and granted on non-preferential basis, which means it must go through the same processes as a loan to a borrower that has no relationship whatsoever with the bank.
All this means lending by a bank to its parent company or to its sibling companies could have dire consequences on the capital of the lender if the loan goes sour, or is even just behind time in terms of repayments. In an industry where bank owners and managers have exhibited severe shortcomings with regards to ethical behaviour and prudence in risk management, the BoG obviously feels that strict limitations and the threat of punitive measures are the best, indeed the only way, to get them to behave correctly.,
Certainly, the new directives will reduce the incidence of connected lending and where it is still done, will force far more circumspection and discipline than what has been applied in the past. Read Full Story