Banks need a more effective loan recovery process, including through the courts, to keep non-performing loans (NPLs) under control and free up funds for new lending, Ghana Association of Banks (GAB) President John Awuah has said.
Awuah said banks can continue financing businesses only if they are able to recover funds from loans that have gone bad and put those funds back into the credit system.
In Ghana, however, banks can face multiple delays and processes when they pursue loan recovery, with some cases ending without the funds being recovered. This leaves capital tied up in distressed loans and reduces banks’ ability to extend credit to other businesses.
“When a bank enters recovery and goes to court, it’s seen as an elephant that is jumping on a certain ant,” he said during a roundtable discussion at the Chartered Institute of Bankers Ghana (CIB Ghana) Post-MPC Policy Seminar, followed by The High Street Journal.
Awuah said the problem is particularly significant because the funds banks lend ultimately belong to depositors, meaning banks must be able to recover loans to continue meeting their obligations while financing new borrowers.
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“It is your money that we lend,” he said.
He said loan defaults also expose banks to losses on the principal, not only interest income, making effective recovery important to the health of the banking system.
Awuah also cautioned against interpreting a lower NPL ratio on its own as evidence that credit quality has improved.
He said the ratio can decline simply because the total loan book grows faster than the stock of bad loans. If NPLs remain around GH¢10 million while total loans rise from GH¢1 billion to GH¢1.2 billion, for instance, the ratio will fall even though the amount of bad loans has not changed.
The banking industry therefore needs to improve both loan recovery and the broader credit architecture, he said.
Awuah said borrowers should also be differentiated according to their credit histories, rather than being treated as having the same level of risk.
A stronger recovery system would allow banks to recover funds from defaulted loans and redirect them towards viable businesses, helping to expand credit without simply increasing the risks already sitting on banks’ books.
