BoG predicts capital erosion of banks due to COVID-19

The Bank of Ghana (BoG) has hinted at a more devastating impact of the COVID-19 in the banking sector.

Following the financial clean-up in 2019, the apex bank was looking forward to a strengthened sector that will be more resilient to support economic growth.

However, the pandemic has extended its tentacles to several sectors and the apex bank fears the impact on the banking sector.

The Governor of the BoG, Dr. Ernest Addison, stated that: “The economic impact of the pandemic will result in higher Non-Performing Loans (NPLs) and capital erosion of banks”.

Speaking at the 2020 GIMPA Law Conference on the theme: “The Banking and Financial Sector Crises in Ghana – Towards Sustainable Reform”, Dr Addison bemoaned the reversal of gains made by the apex bank in the sector.

“…the COVID-19 pandemic has presented an unprecedented
negative shock to the economy and a major test of the resilience and
robustness of the banking sector,” he added.

He pointed out that: “Going forward, the financial sector will require constant regulatory and policy attention to mitigate risks.

He emphasised the need to re-capitalise to resilience and enhance the safety of depositors’ funds in financial institutions.

He said just before the pandemic “Ghana had already turned the fortunes of the banking system around and restored confidence in the sector”.

He said financial sector indicators including earnings, liquidity, and capital adequacy “showed significant improvements”.

Dr Addison cited an overall capital adequacy ration for banks that had “increased to 21.3% well above the regulatory requirement of 11%”.

Non-Performing Loans (NPLs) ratio had also declined from 21.3% at the end of December 2017 to 15.7 as well as increasing profitability, he observed.

The BoG has taken measures to strengthen supervision to identify, access and manage stability and risks.

He indicated that the apex banks have learnt many lessons from the crises with a focus on early warning signals to initiate corrective actions.

He listed symptoms of weak banks which include: poor asset quality, lack of profitability, loss of capital, excessive leverage, excessive risk exposure, poor conduct, and liquidity concerns.

These, he said are as a result of inappropriate business modules, poor governance, poor decision making by senior management and a myriad of other factors.

Financial sector cleanup

In September 2017, the apex bank raised the minimum capital requirement for commercial banks from GHS120m ($21.9m) to GHS400m ($72.8m), giving institutions until the end of 2018 to meet the new threshold.

The reform exercise to clean the sector covered the resolution of four hundred and twenty (420) weak institutions made up of insolvent banks and SDIs. These included nine (9) banks, fifteen (15) savings and loans companies, eight (8) finance houses,
three-hundred and forty-seven (347) microfinance institutions, thirty-nine (39)
microcredit institutions, one (1) leasing company, and one (1) remittance
company.

At the end of the exercise in December 2018, the number of banks had reduced to twenty-three (23) either by shareholders raising capital, through mergers, by
acquisition through other banks, or the Government-administered scheme
called the Ghana Amalgamated Trust.

The recapitalisation repositioned the banking sector and made it better capitalized, liquid, stronger, and more resilient.

Officials from the Securities and Exchange Commission (SEC) also announced increases in the minimum capital requirement for fund managers from GHS100,000 ($18,200) to GHS2m ($364,200).

SEC also went in after the banking cleanup to revoke the licenses of 53 fund management companies to sanitise the sector.

The Bog said these resolved institutions had several deficiencies.

“Some of them were set up overnight with little or no capital and by persons with questionable backgrounds with little or no experience in running banks. A common thread was that they were all managed or controlled by shareholders with complete
disregard for prudential norms and best practices in corporate governance.

“It was clear that they were set up to get access to depositors’ funds to finance
other businesses of shareholders or other related or connected companies. In
the process, oligarchies were formed involving various groups of companies
under the control of common shareholding aided by their relationship with
political authorities,” Dr Addison explained.

Measures implemented by BoG to mitigate impact of COVID-19

Shortly after the country was struck by COVID-19, the BoG announced several measures to mitigate the negative impact of the outbreak.

The interventions included cutting interest rates and reserve requirements, and decreasing banks’ conservation buffers.

Others were::
 Lowering the policy rate by 150 basis points to 14.5 percent;
 Lowering the cash reserve requirement ratio for banks from 10 to 8 percent to
provide additional liquidity to the banks. This policy measure was expected to
free up additional resources of about GHS2 billion for banks and SDIs to lend
to critical sectors of the economy;
 Lowering the Capital Conservation Buffer for Banks by 1.5 percentage points to
11.5 percent and providing capital relief of about GHS1.1 billion for banks to
boost lending to support the economy;
 Changing provisioning requirements for the spectrum of loan categories from
10 to 5 percent and which translates to about GHS115.3 million in capital relief
to banks;
 Restraining banks from paying dividends for 2019 to preserve capital and
liquidity; working with banks to further lower interest rate on credit to private
sector by about 200 basis point;
 Collaborating with commercial banks to create a GHS3 billion credit facility for
key industries including pharmaceuticals, hospitality, services, and
manufacturing sectors; and
 Agreeing with banks to provide a 6-month moratorium on principal payments
for the worst-hit sectors – Airline and Hospitality Industries.