As the coronavirus pandemic is taking a toll on economies around the world, the private sector is one area that is really bearing the brunt of the disease, and Ghana’s situation is no different – the more reason why banks must step in to assist with affordable loans.
Data from the Bank of Ghana indicate that average lending rates from banks in the country have never gone below the region of 23 percent in the past one year. Last week, the central bank reduced its policy rate from 16 percent to 14.5 percent; and in addition relaxed some of its directives, which has resulted in the release of more cash into the system to support businesses.
But banks over the years have argued on the lines of high policy rates, high non-performing loans, high operational cost, among others, for keeping lending rates high. Justified though their case is, the situation now looks quite better; hence the need for them to consider reducing their lending rates to support the private sector in these distressing times.
Director for the Institute of Social, Statistical and Economic Research (ISSER) at the University of Ghana, Prof. Peter Quartey, agrees that banks must reduce their lending rates in this critical moment to support the economy, especially considering measures the Bank of Ghana has introduced to help them.
“Oftentimes when the policy rate is increased, you find lending rates going up. But once it is reduced, the reduction of lending rates becomes very slow. Of course, banks will argue that there are other factors which determine lending rates other than the policy rates. There is cost of operation, default risk, cost of funds and other factors which come into play when you are lending to the private sector.
“But I would still like to see some movement or decline in the lending rate, given what the Bank of Ghana has done. It is not only the reduction in policy rate, the Capital Adequacy ratio has also been revised, the reserve requirement has been revised; so banks have more flexibility and more money to operate with, instead of keeping it at the central bank.
“Some leeway has been introduced, so I believe banks should also respond reciprocally and provide credit at cheaper rates to the private sector,” he said in an interview with the B&FT.
The Bank of Ghana, knowing very well the negative impact the coronavirus pandemic will have on the economy, has taken steps to cushion the financial sector against some of the risks. First, it cut the policy rate by 150 basis points. Then, it further reduced the Primary Reserve Requirement from 10 percent to 8 percent to provide more liquidity for banks to support critical sectors of the economy.
Also, the Capital Conservation Buffer (CCB) for banks of 3 percent is reduced to 1.5 percent, effectively reducing the Capital Adequacy Requirement from 13 percent to 11.5 percent.
Again, provisioning for loans in the ‘Other Loans Especially Mentioned’ (OLEM) category is reduced from 10 percent to 5 percent for all banks and Specialised Deposit-Taking Institutions (SDIs), as a policy-response to loans that may experience difficulty in repayments due to slowdown in economic activity.
Provisioning norms for loans in all other categories are maintained. This should provide capital relief to banks and SDIs in these uncertain times.
All these rafts of swift measures have been taken by the regulator to give banks the necessary flexible room to operate and have adequate liquidity to support critical sectors of the economy. With these favours shown them, it is only fair that banks should reciprocate by providing affordable loans for the private sector to offer a lifeline to industries facing the risk of collapse.