Improve Efficiency - Banks Tell Industry
Commercial banks have called on the private sector, particularly industry, to reciprocate the lowering interest rate regime with efficiency in operations and good corporate governance in order to repay their loans on schedule.
The banks argue that there is a correlation between good corporate governance and proper bookkeeping, and high loan repayment habit and that, many companies that practise them access credit at lower rates from the banks.
Speaking to the GRAPHIC BUSINESS in separate interviews the bankers agreed that the private sector needed to be more efficient in their operations to become responsible borrowers and help the banks to maintain a generally low interest rate regime.
Commenting on the swift positive response by the banks to the Bank of Ghana policy rate cut by 50 basis points from 13.50 per cent in December to 13 per cent on May 13, the President of the Ghana Association of Bankers, Mr Asare Akuffo, told the GRAPHIC BUSINESS that the debate for interest rates to come down, should now shift sharply to how businesses could improve their risk profile and how the regulatory regime could be further enhanced to make lending to the private sector comfortable to the banks.
But the President of the Association of Ghana Industries (AGI), Nana Owusu Afari, said there was more room for the banks to lower their interest rates to the benefit of industry.
“We are still talking with the banks to adjust their interest rates downwards, as Ghana still has one of the highest interest rate regimes in the world,” he said.
In a Business Barometre survey for the first quarter of the year conducted by the AGI, businesses remained optimistic about the economic prospects in the country but continue to sight, access to credit and finance and high interest rates as part of their top 10 challenges.
Banks have started cutting interest rates faster in line with the cut in the Bank of Ghana Policy rates to reflect lowering inflationary pressure, stable exchange rate and a collapse in the rate of government papers, particularly the benchmark 91-day treasury bill.
According to commercial banks, the widespread cuts are also a demonstration of their belief that the economic fundamentals of the country had improved and would continue on that trajectory for the next 12 months.
Currently, Barclays Bank of Ghana has the lowest indicative rate (the lowest rate below which it is not advisable for a bank to lend) of 18 per cent per annum, having revised downwards from 22 per cent; ADB revised from 21.95 per cent to 20.00 per cent and NIB from 23 per cent to 21 per cent while that of Trust Bank stands at 23.50 per cent.
While acknowledging that the business environment had improved with developments such as a working commercial court, a good rapport between the banking industry and the judiciary as well as the establishment of a credit reference bureau and a collateral registry, Mr Akuffo, who is also the Managing Director of HFC Bank Ghana Ltd, said “it is up to the private sector to look inwardly, shape up themselves and improve financial management by mixing acceptable levels of debt and equity.'
The Treasurer at the Agricultural Development Bank (ADB), Mr George Baah-Danquah, also shared in the view that the inefficiency of the private sector could trickle down to the banking sector through high loan default rates which would again increase the cost of funds to the borrower.
“The efficiency of the private sector is key to their ability to repay loans on schedule and therefore affects their risk profile,” he said, adding that the high risk profile of most private corporate entities was also responsible for the high interest they incur for borrowing.
His views were not different from those of Mr Richard Amo-Tachie, acting Treasurer of the National Investment Bank (NIB), who argued that the longstanding high interest rate regime in Ghana was primarily due to inefficiencies inherent in the private sector.
He called on the individuals, corporate bodies, manufacturers and the general public to take advantage of the affordable rates to expand their businesses, but be mindful of sound practices that would guarantee repayment.
But a study by the Bank of Ghana sighted by the GRAPHIC BUSINESS indicates that operational costs, which includes rising staff costs, was the single largest contributor to the determination of base rates by commercial banks.
Why The Sharp Response
The treasurer at ADB told the GRAPHIC BUSINESS that “the policy rate gives the direction where we should go and once the rate has come down in line with inflation, the expectation is that we have to follow suit.” The bankers are therefore unanimous that other indicators which included the rates of the government papers, basically the 91-day treasury bill, usually the benchmark rate, the 182-day, the 1-year and 2-year notes, which had all fallen fast over the last 10 months, helped to convince the financial institutions that the economic stability was real.
Mr Baah-Danquah explained that the sharp responses were anchored on the belief that banks were now confident that the prevailing economic fundamentals were real and would remain stable over a good period of time.
Reinforcing the point, the managing director of HFC Bank said “I have always argued that rate cuts will always come gradually because you do not want to cut only to raise it again in three months. So we wait until we see a continuous stability,” adding that it was better than having a fluctuating interest rate regime.
He adds that the sharp cuts were also a measure by banks to make the base rates to really reflect their true interest rate to their lowest borrowing customers.
As a self regulatory measure sanctioned by the Bank of Ghana, the banks have now decided to publish their true base rates, which means that they could not leave their old rates hanging on their notice boards only to end up lending far below them.
End end
What this means is that any person or entity that borrowed from the banks could be paying exactly the base rate or a few points above them, depending on one’s risk profile.
Taking advantage
The lowering regime is good news to individuals, corporate entities and the lenders themselves, as the banks have vowed to use the occasion to grow their various portfolios.
Housing and real estate forms an important segment of the economy and HFC Bank, which has the expertise in that segment, is hoping to expand its activities in that sector.
However, Mr Akuffo said while the regime would bolster its efforts at mortgage financing and investments in real estate and commercial property, HFC Bank would also take advantage to grow its subsidiaries in Investment Services, Realty services and other areas to make them contribute more to the group’s profitability to compensate for the lowering margins that the lower interest rate regime engendered, considering the keen competition in the banking sector.
ADB, on the other hand, which has expertise in agriculture financing, is hoping to devote yet another 30 per cent of its portfolio to the sector.
“The lower interest rate regime also means that the agricultural sector, the bank’s core market, will be supported not only with increased credit but at lower costs,” Mr Baah-Danquah stated.
For his part, Mr Amo-Tachie said due to difficulties associated with its core area of corporate banking and financing the construction sector, the bank was now doing a fair mix of consumer/retail and corporate banking.