The Chief Executive Officer of Dalex Finance, Mr Ken Thompson, says the risk of default on Finatrade’s GH¢1.2 billion debt to 26 banks could have been minimised, if the affected institutions were more thorough in their assessment of the company’s loan requests and in particular, the interdependencies that existed.
If the banks exercised some extra caution in the approval process, he said some or all of them would have realised that subsidiaries of the Finatrade were inter-related and their risk assessed on a global level.That information would have helped in determining whether or not to grant their loan requests, he said.
Instead, the banks,’obsessed’ with reaping short-term profits, relied on, among other things, the group’s ‘multinational’ status as insurance. Sadly, however, that backfired, resulting in GH
¢1.2 billion (US$300 million) that the group currently owed some 26 banks, Mr Thompson told the Graphic Business on July 31.
“To start with, the banks were greedy and were not as thorough as they could have been,” he said, when the paper sought his views on Finatrade’s debt.
Lack of linkage
Finatrade’s debt, which has been in arrears for some years, is now impacting negatively on the performance of the creditor banks. It has also brought into question the effectiveness of checks and balances, including the Collateral Registry and the Credit Referencing Bureau, which were put in place by the Bank of Ghana (BoG) to help ensure that one customer does not owe more than two banks for a longer period of time.
While the presence of those institutions are relevant, Mr Thompson said their work was made difficult by the lack of linkages in the data collation and sharing processes, a challenge that manifested itself in the Finatrade debt issue.
“Because we do not have some common identification linking all of us, there is always going to be difficult when you are assessing credit information. In other jurisdictions, your social security number is linked to your passport, your driving licence, home address and other information and there is a reason for that.
“With one number, you can get all relevant information with respect to an individual. We do not have this. But despite all of this, common sense should have prevailed. There is a lot of information in the public domain that the banks should have taken into account” he explained.
This challenge, he said complicated an already difficult credit assessment process.
“In sum, I think they had some things that made it difficult for them to do comprehensive credit checks but they did not also extend themselves because they were looking at what they could make in the short term and were not as exhaustive as they could have been,” he added.
Web of companies
The Dalex Finance boss explained that until very recently, the banks had become obsessed with short-term profits which promoted complacency, as ‘visibility’ became more important than a sound assessment of risks based on formal and informal information.
“As far as the banks were concerned, they had been dealing with the group (Finatrade), it was good business and they were going to get paid. That’s one leg of it.”
“Another thing is that the principal shareholder (Finatrade) was using a web of companies, which the banks were aware of this, but they had never defaulted,” he said.
The Finatrade Group is one of the biggest players in the commodities sub-sector, with a host of subsidiaries that include Sucatrade, CCTC, Foods Inn, Dry Foods and AkuafoAdamfo, among others.
Impact on ordinary lenders
On the implications of the development on credit , the banking sector and the banks in question, Mr Thompson said, “it is the ordinary man in the street who will suffer because the banks will be restricted in their ability to grant loans.”
In the BoG’s stability report for May, this year, credit growth declined sharply from 16.8 per cent in March 2015 to 1.2 per cent in March 2016, which the central bank blamed on deteriorating asset quality.
The non-performing loan (NPL) ratio, which measures the default rate in the banking sector, also rose to 16.2 per cent in March, last year, from 11.4 per cent in March 2015.
Going forward, the Dalex Finance CEO said banks need to be more thorough in their assessment of credit risk. The nature and credit history of the borrower in question is only a small part of the risk assessment process.
This will help forestall a repeat of the Finatrade issue, where one group will be indebted to almost all the banks in the country, he said. Mr Thompson is a Fellow of the Institute of Chartered Accountants in England and Wales.