Banks fear defaults

Banks have stated that competition from mouth-watering Treasury bill rates is not the main reason for their apparent reluctance to lend to the private sector, debunking a generally- held perception.

In a new industry survey conducted by the Institute of Economic Affairs (IEA), 50 percent of banks cited high loan defaults, 33.3 percent chose inadequate bankable projects, while a paltry 16.7 percent chose Treasury bills as the most important factor for their reluctance to lend.

“It can be deduced that from the banks’ point of view, high loan default rates is probably the most important determinant of their reluctance to lend to the private sector.

“On the other hand, competition from Treasury bills would appear as the least important factor, again from the banks’ point of view, although there is a strong perception that Treasury bills do compete for loanable funds and may be favoured given the low related risk,” IEA senior fellow Dr. John Kwakye said.

The survey, which covered six out of the 28 banks in the country, studied financial intermediation and the cost of credit in Ghana. The first part of the study involved measuring of financial intermediation/financial deepening using a number of standard indicators.

The second part involved a survey of banks to investigate how industry costs, competition, efficiency, borrower risks, and credit allocation decisions, among others, affect the cost of credit.

On the most-preferred sector to lend to, banks selected the services sector, while agriculture was least-preferred. Their lending to a particular sector is influenced by both return/profitability and risk.

A snapshot of sectoral distribution of outstanding credit as of July 2013 confirms the banks’ view. Services dominates with 65 percent followed by industry with 31 percent and agriculture with a mere 4 percent.

According to the survey, banks indicated that they prefer to lend to the services sector because of low risk, low loan default rates, and good business prospects in the sector.

“Banks regard their reluctance to lend to agriculture as being influenced by high risk in the sector and the low market potential of agricultural produce due to reliance on weather,” Dr. Kwakye said.

The study recommended the need for physical growth of the financial sector and appropriate incentives to be introduced to encourage banks to locate in rural areas. Banks must also actively promote savings and expand lending services by extending their reach and introducing innovative products.

It also added that there is the need to restrain government borrowing by entrenching fiscal discipline while improving efficiency in the financial sector through improved management practices, engagement of qualified and well-trained staff and more modernisation.

The study also called for stronger vigilance and robust financial regulation.