High NPLs mute gains from policy rate drop — Databank

Investment management and advisory firm, Databank, has blamed the limited impact of the historic drop in Bank of Ghana’s (BoG’s) policy rate on the cost of credit to the high numbers of non-performing loans (NPLs) in the banking sector.

At 17.7 per cent, the firm said the rate of delinquent loans was too high for  banks to carry, hence the apprehension that characterised the aftermath of the rate cut in March this year.

As a result, an economic analyst at the firm, Mr Courage Kwesi Boti, said businesses would only begin to feel the impact of the drop after the NPLs have been brought down drastically.

Until that is done, Mr Boti said in a May 18 interview that banks will continue to invest their loanable funds in government treasury securities, with some opting for BoG’s securities.

“When you cut policy rate, you expect that the benchmark interest rate, which is the Treasury bill, will go down and then the market interest rate, which is the lending rate, will also respond.

“But because the NPLs are high and banks are apprehensive of growing their loan books, they are pushing their funds into government securities rather than pushing it to the private sector,” he said ahead of the BoG’s press conference on the policy rate.

The Monetary Policy Committee (MPC) of the bank would start its 76th meeting on May 19, and conclude on Monday, May 22, with the announcement of a new decision on the benchmark rate.

Energy sector debt

After opening the year at 16.07 per cent, the rate on the 91-day Treasury bill improved to 15.7 per cent on March 6 before easing further to 13.03 per cent on May 15. The reduction in rates affected the medium-term securities, with that of the one-year note dropping from 20.5 per cent on January 1 to 16 per cent on May 15.

The drops in the rates are the result of the cut in the BoG’s policy rate by 200 basis points in March this year, Mr Boti said, citing the “natural relationship” between the central bank’s benchmark rate and that of other rates.

Despite the softening of the rates on the government securities, lending rates have remained relatively high, with banks still lending to businesses at an average of 35 per cent per annum.

Although a mismatch, Mr Boti said it was the outcome of the current high NPLs, which have been triggered by the energy sector debt.

“That is what is still keeping lending rates high. Although there is improved liquidity in the banking system, the banks are not willing to give it out or the demand for it is still minimal because the rates are kept high by the banks,” he said.

Bond issue

The current situation, Mr Boti said, required that plans by the government to use proceeds of a GH¢2 million bond, due to be issued this month, to pay off its indebtedness to the banks are implemented to the letter.

He was optimistic the pay-off would help sanitise the books of banks, thereby inspiring them to begin to increase lending, as well as lower the cost of their funds to the private sector.

The government, through the various state-owned enterprises (SOEs) in the power sector, owes the banking sector for loans taken to support their operations.

Part of that indebtedness is the legacy debt of the Volta River Authority (VRA), which was reported at GH¢2.2 billion in July last year, but is now being paid on a quarterly basis through the Power Generation and Infrastructure sub-account.

The account is a creation of the Energy Sector Levies Act (ESLA), which was instituted in 2015 to help gather money from consumers for energy sector expenses.