The Bank of Ghana (BoG), as part of its supervisory and regulatory role over the banking sector, has analysed and identified some red-flags in the banking industry posed by the Coronavirus (COVID-19) pandemic.
Coronavirus, the global pandemic, that broke out later part of 2019 with the first recorded case in Ghana announced in March 2020 havocked and turned upside the world economies. Many sectors of the global economy suffered severely with some sectors yet to recover fully including the banking sector.
COVID-19 has inadvertently forced regulatory and supervisory authorities and agencies to readjust and realign their policies to introduce reforms to help tackle head-on the devastating impact of the pandemic. The banking sector of Ghana was not left out of the reforms as the central bank had to announce a number of reforms in the second quarter of 2020. Yet, there are still some lingering threats that need to be addressed by industry players as identified by the BoG.
“We were fortunate that the financial sector reforms introduced over the last three years strengthened the balance sheet of banks and improved their solvency”, Dr. Ernest Addison, Governor of the Bank of Ghana said when delivering the keynote speech at the Ghana Association of Bankers (GAB) webinar on the topic: ‘Managing Banking Risks in Uncertain Times – COVID-19 test case’ he said that the human, health, economic, and financial costs of this pandemic are still mounting.
“The Banking System was better placed to absorb crisis and provide the financing needs of the economy as a result of the reforms including the recapitalisation of banks. Secondly, the government was also swift in putting into place measures to mitigate the impact of the crisis on the economy.
“The bold measures, including the COVID-19 Alleviation and Program to contain the economic burden of the pandemic on households and small businesses including the GH¢600 million financial support to medium and small-scale enterprises, absorption of water and electricity bills, tax reliefs for frontline workers, among others. On the financial sector, the Bank of Ghana introduced policies and regulatory reliefs to support credit extension and ease off possible banking sector liquidity constraints that may emerge as a result of the pandemic”, he boasted.
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“Among others, the Bank lowered the policy rate by 150 basis points and reduced the macro-prudential Capital Conservation Buffer and Cash Reserve Requirement for banks, as well as lowered the primary reserve ratio of savings and loans companies, finance house companies, and rural and community banks. The provisioning for loans in the “OLEM” category was also lowered for both banks and Specialised Deposit-Taking Institutions (SDIs).
“To a large extent, these regulatory reliefs proved timely for the banking sector as it navigated the unchartered paths during the pandemic. The latest assessments have shown the resilience of banks to the first wave of the pandemic supported by strong policy support and COVID-related regulatory reliefs which helped expand lending activities. New Advances grew by 15.8 percent year-on-year to GH¢34.4 billion in 2020, and banks provided support and reliefs in the form of loan restructuring and loan repayment moratoria to cushion some 16,694 customers severely impacted by the pandemic. At the end of December 2020, total outstanding loans restructured by banks amounted to GH¢4.5 billion, representing about 9.4 percent of the industry loan portfolio. These add to the strong outturn of the Financial Soundness Indicators, alongside strong growth in assets, deposits, and investments.
These positive results notwithstanding, we must admit that the pandemic has also introduced several risks in the banking sector. Let me highlight three major risks that the pandemic either unearthed or intensified, which must be efficiently managed by banks to avoid any unintended consequences on the industry. These are cybersecurity risks, credit risks, and operational risks.”
Although the pandemic boosted the move towards digital transactions and financial inclusion, it also brought in its wake a heightened sense of cyber-attacks within the financial sector. The use of digital and mobile banking platforms to conduct banking transactions has increased since the outbreak of the COVID-19 pandemic. This is evidenced by peer-to-peer, bank-to-wallet, wallet-to-bank, and wallet-to-bank transactions across all platforms. Banks have responded positively to this phenomenon and deployed sophisticated, yet user-friendly digital platforms to enhance the delivery of financial services.
This trend is indeed welcome, as it broadly aligns with the overall objective of digitising the Ghanaian economy, and promoting financial inclusion and economic growth.
Yet, the drive towards more digitisation has heightened cyber risks and fraud and therefore calls for effective cyber risk management policies and procedures by banks. The Bank of Ghana expects all banks to build robust systems to forestall such cybersecurity incidences. All the successes chalked in the digitisation of banking systems would be eroded if adequate investments are not made for the effective protection of the information technology and security infrastructure. In this regard, the Bank has issued directives and guidelines such as the Cybersecurity Directive that banks must meet on an ongoing basis to effectively manage cyber risk and fraud.
Secondly, credit risk has become critical and requires the attention of all of us. The sharp slowdown in economic activity has ramifications for the solvency of some households and businesses. Lenders within sectors strongly hit by the impact of the pandemic, particularly those in industry and services sectors, are more vulnerable. To possibly mitigate the risk, moratoria on repayment of loans and overdraft facilities, flexibility in the application of accounting and regulatory standards in the treatment of potential impaired loans have been emphasized by international accounting standard setters and the Bank.
This is why the introduction of the regulatory reliefs has proved timely and banks have responded appropriately with some form of forbearance for customers. These include rolling forward interest and principal payments, interest repayment waivers, and offering new loans to enable borrowers with reasonable longer-term prospects to stay afloat in these challenging times.
The challenge going forward is how well banks account for the impact of the reliefs in terms of loan classification, expected credit losses, provisioning, credit risk weightings, and the overall impact on their capital ratios/ key performance indicators. For instance, loan loss provisions grew by 28.0 percent, higher than the 23.6 percent a year ago reflecting elevated credit risks in 2020. Higher provisioning helps to improve loss absorption capacity and the early recognition of losses is helpful. Also, the Non-Performing Loans (NPL) ratio of the industry increased from 14.3 percent in December 2019 to 15.7 percent in June 2020, arising from the pandemic-induced repayment challenges, but has since declined to 14.8 percent in December 2020 due to loan write-offs and increased credits, particularly in the last quarter. In response to these developments, banks may need to strengthen credit risk management policies and engage in risk-sharing arrangements through syndications.
The COVID-19 related partial lockdowns and restrictions to contain the spread instigated the work-from-home concept, which poses some operational risks to the industry, which if not well managed can affect the smooth operations of any bank. The engagement of third-parties by some banks to perform some non-core functions could also be threatened by weaknesses in financial and operational resilience
The Industry data showed that growth in operating expenses moderated from 11.1 percent in 2019 to 8.2 percent in 2020, driven mainly by a slowdown in the growth of staff-related costs, which recorded a 6.2 percent growth in 2020 compared with 14.7 percent a year ago.
Other operating expenses, however, increased by 10.6 percent from 7.2 percent a year earlier. Part of the increase in other operating expenses was related to costs associated with implementing safety protocols and containment measures of COVID-19, as well as activation of Business Continuity Plans (BCPs) by banks, he said.
Notwithstanding the pandemic-induced increases in the industry’s cost of operations, banks did not pass on those costs to consumers in the form of higher interest margins but adopted other cost control measures to cushion their bottom line.
Disruptions in banks’ operations and business continuity concerns, orchestrated by the pandemic, remains critical in these uncertain times, especially with the recent rise in the infection rate. We must all adapt to this ‘new normal’ of working and going forward, BCPs must focus on end-point and network security measures with robust user authentication protocols to minimise abuse of banks’ systems.
Risk-based business continuity plans and innovation stand out as key to survive in uncertain times. Consequently, operational risks need to be effectively managed and banks must continuously test the adequacy of their BCPs to facilitate continuous operations and service delivery.
By Adnan Adams Mohammed