Banks facing rising NPLs amid credit growth

By Ebenezer Chike Adjei NJOKU

[email protected]

The banking sector is showing signs of recovery from impacts of the Domestic Debt Exchange Programme (DDEP) with private sector credit extension improving, but a sharp rise in non-performing loans (NPLs) threatens to derail progress according to latest data from the Bank of Ghana (BoG).

Private sector credit grew by 17.6 percent in nominal terms for June 2024, up from 16.1 percent a year earlier Governor Ernest Addison revealed during the 119th Monetary Policy Committee press briefing. However, while improving, the real growth rate remained negative at -4.2 percent as the credit expansion continued to trail inflation.

“Private sector credit extension steadily improved in first-half of the year. In nominal terms, private sector credit grew by 17.6 percent in June 2024 relative to the 16.1 percent growth recorded for the comparative period of 2023. In real terms, the contraction in credit to the private sector moderated at 4.2 percent compared to a contraction of 18.5 percent recorded in June 2023,” Dr. Addison said.

This comes as the banking sector’s total assets surged by 33.3 percent year-on-year (YoY)  to GH¢323.1billion in June, with profitability and efficiency indicators also showing improvement. This growth outpaced the 21.2 percent increase recorded in the same period of 2023, signalling a robust recovery trajectory.

Despite these positive indicators, the sector faces a looming threat from deteriorating asset quality. The NPL ratio jumped to 24.1 percent in June 2024 from 18.7 percent a year earlier, highlighting the elevated credit risk in the system.

Industry observers have suggested that the rise in NPLs is a cause for concern as it could potentially offset the gains made in other areas. They contend that it reflects the ongoing economic challenges and the lingering effects of the debt exchange programme on borrowers’ ability to service their loans.

According to PwC’s analysis of the industry as captured in its Banking Survey 2024, market concentration has deepened with the top-five banks strengthening their grip on the sector. Their combined market share of outstanding credit stood at 55.9 percent at the end of 2023.

The Capital Adequacy Ratio (CAR) without regulatory reliefs improved to 10.6 percent at end-June this year from 7.4 percent a year ago, but remains below the pre-debt exchange levels. With reliefs, the CAR held steady at 14.3 percent – providing a buffer against potential shocks.

Governor Addison emphasised the need for banks to comply with recapitalisation plans and enforce strict credit underwriting standards to ensure full recovery and resilience.

“The consistent rebound in profits, adherence to recapitalisation  plans and enforcement of strict credit underwriting standards will help ensure banks
remain on the path to full recovery and resilience,” he added.

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