BoG outlines COVID-19 red-flags in banking sector

Adnan Adams Mohammed
The Bank of Ghana (BoG), as part of its supervisory and regulatory role of the banking sector has analyzed and identified some red-flags in the banking industry posed by the Coronavirus pandemic.
Coronavirus, the global pandemic, that broke out later part of 2019 with 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 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.
“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 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.”
Cyber Security 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 userfriendly 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 effective protection of the information technology
and security infrastructure. In this regard, the Bank has issued directives and
guidelines such as the Cyber Security Directive that banks must meet on an
on-going basis to effectively manage cyber risk and fraud.
Credit Risks
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 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 writeoffs 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.
Operational Risks
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 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 stands
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.
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