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BusinessBanks prioritizing cash reserves over private-sector lending despite CRR directive

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Banks prioritizing cash reserves over private-sector lending despite CRR directive

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Recent data from the regulator suggests that banks are showing a greater inclination to maintain a significant portion of their deposits as reserves with the Bank of Ghana (BoG) rather than extending loans to businesses and households.

The latest figures reveal a notable slowdown in private sector credit growth. Year-on-year growth decreased from nearly 19.8 percent in April 2023 to 10.8 percent in April 2024. Even after adjusting for inflation, credit to businesses has declined by 11.4 percent, compared to a 15.2 percent decline recorded over the same period last year.

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Meanwhile, the proportion of deposits that commercial banks hold with the apex bank has increased from 46.5 percent in April 2023 to 51.9 percent this year, primarily attributed to the new cash reserve ratio directive.

“Commercial banks’ reserves with the central bank surged following implementation of the dynamic Cash Reserve Requirement (CRR). As at end-April 2024 reserve money growth, on a year-on-year basis, had increased to 51.9 percent (mainly due to the changes in regulatory reserves) relative to a growth of 46.5 percent in April 2023,” BoG Governor Dr. Ernest Addison said during a press briefing for the 118th Monetary Policy Committee (MPC) meetings.

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The central bank implemented this measure to discourage banks from prioritizing investments in government securities, particularly Treasury bills, over extending credit to the private sector. It also aimed to absorb excess liquidity in the financial system.

Under the new CRR system, banks are subject to a tiered structure where they maintain a lower CRR if they exhibit a higher loan-to-deposit (L/D) ratio. In essence, banks that extend more loans are required to hold less money in reserves with the BoG.

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Starting April 1, 2024, banks with loan-to-deposit ratios (LDR) exceeding 55 percent must maintain 15 percent of their deposits as reserves (CRR), while those with ratios below 40 percent are obligated to hold at least 25 percent of deposits in reserves. This policy change coincided with a notable decrease in private-sector lending, as reported by Dr. Ernest Addison.

In February 2024, credit growth to businesses plummeted to 5.1 percent, a stark decline from 29.5 percent recorded a year earlier. During this period, banks increasingly directed their investments towards government bonds, which surged to GH¢53.6 billion, marking a substantial year-on-year rise of 67.6 percent compared to the previous year’s increase of 36.9 percent.

This trend persisted despite a significant uptick in deposits witnessed by banks, attributed to the Domestic Debt Exchange Programme. Deposits surged by 25.5 percent year-on-year to GH¢224.4 billion in February 2024.

While analysts caution against drawing definitive conclusions at this stage, some suggest that banks are exploring alternatives to lending to the private sector.

“Let us be serious; banks are not going to increase lending in this high-risk environment and risk raising their NPLs (non-performing loan ratio), which will only invite more scrutiny from the central bank,” an analyst who sought anonymity said.

This comes as BoG data showed that the industry’s NPL ratio stood at 25.7 percent in April 2024 versus 18 percent a year ago, with the central bank attributing this to “the lagged effect of COVID-19 pandemic and economic crisis of 2022 which led to the downgrading of several large exposures of banks”.

The industry remained on the path to recovery, the BoG stated, as total assets increased by 28.8 percent to GH¢306.8billion at the end of April 2024 driven by domestic currency deposits and other funding sources.
Banks also reported higher profits for the first four months of 2024 compared to the same period in 2023.

“Key financial soundness indicators generally improved during the review period. The capital adequacy ratio adjusted for reliefs increased to 15.5 percent in April 2024 from 14.7 percent in April 2023, reflecting the rebound in profits. The capital adequacy ratio without relief for the banking system was 11.5 percent at the end of April 2024 compared to 7.6 percent in April 2023. Liquidity and efficiency indicators also improved in April 2024 compared to the same period last year,” Governor Addison further stated.

The central bank implemented this measure to discourage banks from prioritizing investments in government securities, particularly Treasury bills, over extending credit to the private sector. It also aimed to absorb excess liquidity in the financial system.

Under the new CRR system, banks are subject to a tiered structure where they maintain a lower CRR if they exhibit a higher loan-to-deposit (L/D) ratio. In essence, banks that extend more loans are required to hold less money in reserves with the BoG.

Starting April 1, 2024, banks with loan-to-deposit ratios (LDR) exceeding 55 percent must maintain 15 percent of their deposits as reserves (CRR), while those with ratios below 40 percent are obligated to hold at least 25 percent of deposits in reserves. This policy change coincided with a notable decrease in private-sector lending, as reported by Dr. Ernest Addison.

In February 2024, credit growth to businesses plummeted to 5.1 percent, a stark decline from 29.5 percent recorded a year earlier. During this period, banks increasingly directed their investments towards government bonds, which surged to GH¢53.6 billion, marking a substantial year-on-year rise of 67.6 percent compared to the previous year’s increase of 36.9 percent.

This trend persisted despite a significant uptick in deposits witnessed by banks, attributed to the Domestic Debt Exchange Programme. Deposits surged by 25.5 percent year-on-year to GH¢224.4 billion in February 2024.

While analysts caution against drawing definitive conclusions at this stage, some suggest that banks are exploring alternatives to lending to the private sector.

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