Banks tighten credit stance

Despite the  handsome profits enjoyed by financial institutions in the country, the cost of borrowing is still high for the average Ghanaian.

Credit stance on loans to enterprises  tightened during the August, 2014 survey period with net tightening of credit to enterprises with different sizes and maturities.

The tightening reflected banks’ expectation regarding the general economic environment, tightening of monetary policy rate and cost of funds, as well as balance sheet constraints.

Banks have also increased margins on average loans, margins on riskier loans and collateral requirements.

Until recently, the Monetary Policy Committee (MPC) of the Bank of Ghana had maintained a fairly stable prime rate--the reference interest rate used by the banks-- yet, on the ground, banks and other loan companies did not reflect this in their lending practices.

Recent prime rate increase was at the back of rising inflation, which according to the BOG “has pushed up the disinflation path further from the target in the horizon, and monetary policy needs to be vigilant to avoid a build-up in inflation expectations.’’

The high cost of borrowing from the banks and other financial institutions has got people talking.

What is more, many people see the wide spread between deposits and loans by deposit-taking institutions as unjustifiable in some cases.

Interest rate spread

In fact, the issue of spread between interest on deposits given by the banks and interest rates on loans and other credit advances has become topical in recent months.

It is not that this has suddenly become a problem but it is because now people have become more aware of the official rates issued by the BOG, they have become amazed at the practices of their own banks.

What is significantly worrying to many is the low interest paid on deposits, and the very high interest charged on credit advances.

Currently, the average interest on deposit by all the 28 banks operating in the country is less than 15 per cent, while lending rates are as high as 35 per cent on the average, depending on the bank or the kind of financial institution you are doing business with.

Interestingly, the base rate is between 25 per cent and 27 per cent, which is mostly used for inter-bank lending and borrowing, but with a spread of between six to seven per cent, and depending on the risk associated with the business or the individual,  interest on loans to consumers could be as high as 33 per cent.

The high lending rate is even worse when it comes to the non-bank financial institutions. The rate they charge on loans seems to have no ceiling.

Again for the non-banking institutions such as finance houses, the interest charges range between 61 per cent and 95.04 per cent annually.

Already some banks have announced upward adjustments in their base rates to reflect the increase in prime rate.

The high lending rate has a multi-dimensional effect on the economy. Many people have ended up in debts because of the unscrupulous lending practices of some of these financial institutions.

Most borrowers are often not aware of the financial implications if they are unable to service their loans.

Even for those who know the implications, some still go ahead to borrow from bad lenders because of their dire need for cash.

Even though the banks,  for example, generally admit that they are concerned about the effects of the high rates charged to customers on loans, they seem unprepared to do something about it.

The explanation given by the banks is that it is perfectly normal to charge a higher interest when you perceive an individual or institution to be a high-risk client.

This, of course, is purely on the basis of the economic theory of risk and reward-- where you would expect a higher return for a risky project.

But given that there are no credible credit reference agencies in the country for the banks to rely on in their assessment of loan applicants, the unfortunate situation is that every individual without collateral for a loan is a high risk client to the banks.

It is widely expected that the introduction of the credit reference agency law should change all this, by making it easier for individuals and companies deemed creditworthy to access loans cheaply for their businesses and personal projects, leaving bad borrowers to pay the higher rate.

But the credit reference agency law alone will not change the plight of many Ghanaians who have already lost their properties and other assets due to their inability to pay for a loan they had secured on these assets.

The argument is not that people should contract loans and not pay. It is far from that. The issue is more to do with the rate of interest charged that normally make it practically impossible for people to pay back their loans, even with the best of intentions.

Credit Portfolio Analysis

Real loans and advances of the banking industry grew, in year-on-year terms, by 25.1 per cent at the end of July 2014 compared with 17.8 per cent growth recorded in the same period in 2013.

Credit to the private sector also grew in real terms by 28.9 per cent at end of July 2014 compared with the 13 per cent growth at the end of July 2013.

Credit to the households also grew in real terms by 26.2 per cent in July 2014 compared with 18.8 per cent growth recorded in the same period in 2013.

The composition of banks’ credit portfolio by economic institutions showed that the government and public institutions received 5.6 per cent of total credit at end July 2014 compared with 6.9 per cent recorded in July 2013.

Credit to private enterprises, however, accounted for 75.7 per cent of gross loans in July 2014, compared with 73 per cent recorded in July 2013.

The share of household loans in gross loans increased to 16.1 per cent in July 2014 from 15.8 per cent in July 2013.

Credit to public enterprises accounted for 2.5 per cent of gross loans and advances in July 2014, compared with 4.3 per cent registered in July 2013. GB