Banks take issue with BoG

Banks are questioning the Bank of Ghana’s new guidelines on measuring non-performing loans (NPLs), which they say overstate their bad-debts ratio.

The new guidelines, which require a loan to be classified as non-performing if it is defaulted upon for at least 90 days, produce NPL ratios that are much higher than the method applied under the International Financial Reporting Standards (IFRS).

The banks contend that higher NPLs under the BoG method create the impression of weak risk management and liquidity challenges in the eyes of their investors and clients.

The Chief Financial Officer of Standard Chartered Bank, Dayo Omolokun, said even though not all banks publish their results, looking at the general economic environment, generally, one should expect that based on the BoG guidelines the NPLs will increase on industry basis “but it is something we need data to confirm”.

He noted that the banking industry has been reporting based on IFRS, but the BoG has instructed that NPLs must be computed based on its Prudential Guidelines.

“This creates a kind of distortion in the market. On one hand we report based on IFRS and somewhere the BoG says you must disclose the information based on what they have given you. It is something we have continued to engage them on.

“If we are going to adopt IFRS, we need to adopt it in full. You cannot say adopt this part and neglect others. It is a continuous engagement that we need to have, and I think at a point in time they will be able to change some of these things because it creates distortions; particularly when you compare,” he added.

Based on the BoG’s guidelines, 2014 third quarter data from the seven listed banks has seen NPLs rise for five of them. CAL Bank has seen its ratio increase from 5.8 percent to 8.6 percent. That of HFC Bank has also increased marginally from 9.8 percent to 10.45 percent while UT Bank’s has increased from 9.7 percent to 13.6 percent.

Societe Generale has seen its NPL more than double from 6.5 percent to 14.2 percent, and Standard Chartered has also seen an increment from 10 percent to 18.7 percent. Only the GCB Bank and Ecobank have seen a drop -- from 15.4 percent to 9.4 percent and 6.4 percent to 5.2 percent respectively.

In its last Monetary Policy Committee (MPC) report, the BoG said non-performing loans in the banking industry reduced from 12.9 percent in September 2013 to 12.1 percent in September 2014.

Despite the decline, the ratio of non-performing loans is seen as high and remains above lower levels of 7-8 percent between 2007 -- 09.

Philip Owiredu, an Executive Director at CAL Bank, has also noted that the directive is unrealistic and will have repercussions on the banking sector -- appealing to the BoG to review the directive.

“If you look at the recovery process in any bank, if a loan is non-performing you try as much as possible to come to some sort of terms with the client to be able to recover the loan. But the BoG’s rules don’t allow for all these terms. As long as the time has elapsed, classify the loan as a loss,” he said.

However, Simon Dornoo, Managing Director of GCB Bank told the B&FT that the BoG guidelines are “stringent”, “conservative”, and “simpler”.

“The BoG guidelines are more stringent that the IFRS rules. For me, these guidelines are more prudent, conservative and address some of the weaknesses in the IFRS methodology,” he said.

He added that the issue is not about the industry but recognising the fair value of the assets one has. “Is that asset realisable? This is at the heart of the issue and it’s not about methodology at all. Whichever methodology is applied, the test is whether or not that asset has been reflected at the appropriate level . “If you over-inflate the asset values what tends to happen is that you might end up over-inflating your profits; and when you inflate your profit what happens is you might pay more dividends only to find out, a year later, you have holes in the balance sheet.”

He thinks that the debate is rather about what properly reflects the value of assets that banks carry on their books as opposed to something called a methodology. “My view is that the BoG one is more conservative.”

He added: “Since the industry is regulated by a central bank, they have every right to prescribe guidelines and so to that extent one cannot fault the BoG, it is their mandate.”

He added that even the IFRS methodology is being challenged all over the world. “Currently, the IFRS is being revised to an approach that makes it more forward-looking. Going forward, IFRS is now going to be based on expected losses instead of incurred losses. The methodology is changing and getting more stringent, and quite frankly it is open to debate. For us, we have to manage the two regimes.”