| By By Charles Nixon Yeboah Banks operating in the country continue to record huge bad debts, which threatens the overall delivery of credit and growth in the economy. According to the latest Monetary Policy Committee (MPC) of the Bank of Ghana (BoG) report, the ratio of Non-Performing Loans (NPL) to gross loans for February 2010 was 20 percent, rising from 16.2 percent in December 2009. The ratio of NPL to gross loans was 7.7 percent in December 2008. Some analysts, who spoke to CITY & BUSINESS GUIDE, described the situation as dangerous to the financial sector of the economy, with the Nigerian crisis and global credit crunch still fresh in the minds of Ghanaians. This paper has gathered that more than two-thirds of the banks recorded huge bad debts. The situation appears to have affected loan advancements to individuals and the private sector. However, the banking system was well capitalized and liquid with the Capital Adequacy Ratio, which measures the banking system capacity to withstand unexpected losses, increasing from 14.8 percent in February 2009 to 19.7 percent in February 2010. Meanwhile, the latest survey of credit conditions conducted by BoG in March 2010 showed a general net that tightened credit to enterprises and households for mortgages in the first quarter of 2010. Significantly, there were additional declines in net demand for long term credit. The cost of funds and increases in classified loans contributed to the net tightening of credit. Non-price terms and conditions such as shortening of the maturity of loans, and the requirement of additional loan covenants and collaterals were employed to tighten the credit stance in the first quarter of 2010. Credit to the private sector and public institutions over the 12-month period to February 2010 increased by GH˘0.8 billion (13.2 percent) compared with GH˘1.9 billion (46.9 per cent), which was recorded for the same period in 2009. For the first time, the agricultural sector absorbed most of the credit extended in the year to February 2010. The agricultural sector received 20.2 per cent of the flow of credit, while electricity, gas and water absorbed 18.8 per cent. Other major recipients included the manufacturing sector (16.9 per cent), import trade (16.5 per cent) and construction (15.4 per cent). In a related development, the Central Bank for the second time in the year has adjusted its Policy Rate, the Prime Rate from 16 percent to 15 percent, a 100 basis points reduction due to the decline in inflation. Inflation, the main determinant of interest rate, eased for the ninth consecutive month, signaling a cut in the Central Bank’s policy rate-the rate at which it lends to banks. It recorded 13.32 percent in March 2010 as compared with 14.23 percent in February. In February, the Monetary Policy Committee (MPC) adjusted the benchmark indicator down by 200 basis points from 18 percent to 16 percent after inflation declined, culminating in the reduction of Treasury Bill rates. The drop is expected to trigger a decline in the lending rates of commercial banks, but economists, analysts and market watchers are concerned about the margin of reduction that the banks would effect.
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