Banks pulling back from new lending

The long anticipated decision by the Bank of Ghana’s Monetary Policy Committee to cut the benchmark Monetary Policy Rate has not given corporate Ghana the enthusiasm and relief it was supposed to because even as the country’s banks and other commercial lenders re-calibrate their lending rates in response to this week’s 150 basis points cut in the MPR they are already tightening their credit stance in response to the uncertainties brought about by the arrival of the coronavirus pandemic in Ghana.

Although the reduction in the MPR is bigger than earlier anticipated – few businesses had expected a cut of more than 100 basis points – bankers are already warning that loans will be much harder to secure than hitherto as the coronavirus has greatly increased the risk of loan default. This means lenders will demand wider interest margins to compensate them for the greater credit risk, which would negate the expected significant reductions in base lending rates, that will result from the MPR cut.

But more worrying for business owners and managers is the fact that most lenders intend to simply cut back on new lending, even at significantly wider effective interest margins, because, as one banker succinctly put the situation yesterday, “with the arrival of coronavirus, credit risk can no longer be properly quantified and priced.”

The BoG, anticipation of this has announced a two percent reduction in primary reserve requirements, from 10 percent to 8 percent and a 1.5 percent reduction in the capital adequacy buffer, from 3.0 percent to 1.5 percent (thus reducing the minimum effective capital adequacy ratio from 13 percent to 11.5 percent.) Both measures effectively free up more money held by banks for lending.

But bank chieftains who spoke to Goldstreet Business yesterday said that new lending will be restricted mainly to working capital loans for regular customers with well-established track records of strong cash flows, and who are not engaged in activities which will inevitably be hard hit by fears of becoming infected. Thus, for instance, enterprises that provide essential goods and services such as food and petroleum products will still be given working capital loans, but enterprises in the hospitality and travel industries for example will find it difficult to secure financing for now, because their revenues are sure to decline significantly while the virus is making the rounds. Most longer-term loan application assessments are being put on hold until the situation going forward becomes clearer.