Faced with tightened monetary conditions imposed by the Bank of Ghana, a rising incidence of Non Performing Loans (NPL)s on their books, sluggish growth in availability of funding and high offered interest rates on risk free government securitized debt, Ghana’s universal banks are losing their enthusiasm for granting new loans.
The result is slower growth in their lending to large, medium and small scale enterprises alike, both publicly and privately owned, as well as to households for consumption and for home purchases.
Importantly, the slowdown in bank lending applies to both short term and long term lending.
The tightening of credit conditions by the banks during the last quarter of the year was a reversal of slight easing of credit conditions imposed during the 3rd quarter.
Instructively, the most recent tightening is deeper than the previous one which occurred during the 2nd quarter of the year but which, unlike the latest bout, did not adversely affect short term lending and lending to large scale enterprises.
The latest tightening has affected all types of borrowers and the entire spectrum of loan tenors.
It has also occurred despite a rise in demand for credit by SMEs and households.
Demand for credit by large enterprises declined however during the last quarter of 2015, the BoG reports, as big firms have increasingly resorted to financing working capital from their own balance sheets rather than incur high financing costs due to high borrowing rates, that eat deep into their gross earnings.
Another important trend reported by the latest BoG report is falling demand for long term credit, ostensibly because borrowers are reluctant to get locked in to the relatively high lending rates that currently obtain, for extended periods of time.
But demand for short term working capital credit has continued to rise, especially among capital deficient SMEs and households who have sought to smoothen over their consumption through consumer credit in the face of falling real incomes.
However several factors have combined to discourage banks from meeting such rising demand for credit and indeed these have reflected in overall lending growth for the entire year.
One is the deliberate tightening of monetary policy by the BoG to slow down credit growth with a view to dampening credit driven demand, especially that for foreign exchange, which ultimately would fuel demand pull inflation.
Over the last four months of 2015, the BoG’s benchmark Monetary Policy Rate was hiked by a cumulative total of 300 basis points, bringing it to a record high of 26%.
While the effect of these hikes have not shown openly in the form of publicized increases in the base lending rates of the respective banks, they have quietly increased their effective lending rates and tightened their non interest conditions for obtaining loans.
Secondly, the rate of growth of the banks’ access to funds for on lending to customers is declining. In 2015, the total deposits liabilities of the banking industry grew by 27.2% to reach GHc41.26 billion, showing much slower deposit growth than the 39.2% achieved in 2014.
Deposit growth was particularly constrained by a slowdown in foreign currency deposits from 49.9% in 2014 to just 25.3% last year, the result of both declining foreign exchange earnings and slower cedi depreciation.
Similarly, growth in borrowings by the banking industry dropped sharply from 69.2% in 2014 to just 15.66% in 2015, while the industry’s shareholders funds growth slowed from 38.4% to 24.2% over the same period.
All this has forced banks to slow their lending in consonance with the slowdown in the growth of their lendable resources.
Thirdly, the quality of the loans that the banks have given, have been deteriorating, increasing the likelihood of loan losses and forcing the banking industry to make increasing loan loss provisions out of their capital.
By the end of 2015 the entire banking industry was saddled with non performing loans to the tune of GHc4.72 billion up from GHc2.72 billion a year earlier.
This translated into a non performing loans ratio of 14.9%, up significantly from 11.2% as at the end of 2014.
In the face of deteriorating loan quality, and offered the opportunity of interest yields of up to 25% on short term government treasury bills which do not carry the risk of default, it is little wonder that banks are losing their enthusiasm to lend.
The result: in 2015, total loans outstanding of the banking industry grew, in real terms by just 6.7%, less than a third as fast as the 21% growth in real terms achieved in 2014.