BoG introduces measures to boost credit to private sector

The Bank of Ghana has introduced a series of measures that are expected to boost credit to critical sectors of the economy in the wake of the Covid-19 outbreak.

The measures include reduction of the Primary Reserve Requirement from 10 per cent to 8 per cent to provide more liquidity to banks and SDIs and reduction of the Capital Conservation Buffer (CCB) for banks from 3 per cent to 1.5 per cent.

In addition to the measures, there has been a reduction of provisions for loans in the ‘Other Loans Especially Mentioned’ (OLEM) category from 10 to 5 per cent for all banks and SDIs as a response to loans that may experience difficulty in repayments due to economic slowdown.

Additionally, loan repayments that are past due for Microfinance Institutions for up to 30 days shall be considered as ‘Current’, to buy defaulters some time to pay back as is the case for all other SDIs.

Despite the existence of these measures to boost liquidity, banks’ response seems slow in reacting or leveraging the extra cash in sectors that would not directly impact the struggling businesses in need of the funds the most.

As a result, the BoG has been compelled to issue new directives as to how the extra funds from these relaxed rules should be put to use in order to benefit the intended purpose for which it was introduced, is the private sector.

The new guidelines

According to the new guidelines, banks and SDIs are to refrain from declaring and paying dividends or making other distributions to shareholders for the 2019 financial year, unless the Bank of Ghana shows satisfactory with the institution meeting the regular prudential requirements.

Also, that the institution is not relying on the additional liquidity released by the policy measures enumerated above to pay shareholders.

In addition to this, all banks and SDIs shall seek prior approval from the Bank of Ghana through writing before the declaration and payment of dividends.

Again, the order says banks and SDIs are to desist from utilising the released liquidity based on the above policy interventions to purchase government of Ghana and Bank of Ghana Securities.

How will BoG achieve this?

To ensure full compliance with these directives, the Bank of Ghana says it will strengthen its monitoring mechanisms and apply sanctions to any bank or Specialised Deposit-Taking Institutions that go contrary to the directive.

Again, aside making enough credit available with these new directives, it is expected to further lead to affordable credit to the private sector, since the high cost of credit is a headache for businesses in the country.

Data from the Bank of Ghana indicate that average lending rates from banks in the country have never gone below 23 per cent in the past year.

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.

In justifying their concerns, the situation has been eased by the central bank’s current intervention_ hence the need for banks to consider reducing lending rates to support the private sector in these difficult times.