The Covid-19 pandemic continues to have negative impact on economies worldwide with an adverse impact on credit quality. Fundamentals of some economic sectors and businesses had already failed – more are failing. Revenue and income levels dropped—indebted sectors and households have been placed in positions where they may never be able to repay their debts in full – simply cash trapped. For majority of borrowers, the probability of default had increased.
The Loan Department of most Banks in Ghana have never been the same since the beginning of March 2020. Several simulations were undertaken on the loan book to predict likely defaults. Projected revenue estimated at the point of asset creation had to be adjusted downward to accommodate various pricing reliefs granted to impacted borrowers.
For most Loan Managers, it almost became a habit of waking up feeling grumpy after just 3 hours of sleep. And those that could afford to dream, had to deal with the following nightmares:
ARE ALL SECTORS OF THE ECONOMY STILL VIABLE TO LEND TO?
The decision to continue to support economic growth especially to sectors impacted heavily by granting additional credit became a headache. The Bank of Ghana, based on the 2% reduction in reserve ratio, expected Banks to grant more credit with the extra liquidity released. A decision had to be made to strike the correct balance between watch-listed customers/sectors that have already suffered business decline and those that are potential winners during the pandemic. All one could do was to pray and hope that whatever decision to be taken was an appropriate solution to a temporary situation. The decision to or not to allow utilization of undrawn limits for existing commitments to customers in affected sectors was a dilemma. Another challenge was whether to or not to wind down existing committed lines.
HAS THE FUNDAMENTALS OF FUNDING CHANGED?
Just about a year ago, the state of receivables and stock in trade funded by Banks had to be given more attention. Suddenly, not every stock in trade was considered an essential product or a fast moving consumable. Expected receivables from erstwhile good counterparties could not be considered same without making reference to the operating sector of that Counterparty. Receivables from negatively impacted COVID-19 counterparties delayed which had negative impact on actual loan repayment by borrowing clients. Most credit teams had to device various approaches to get close to funded receivables and stock without pressing the panic button unnecessarily. To most Banks, the impact of the pandemic was severe enough to warrant a total review of funded stock and receivables.
BALANCING EMPATHY AND PAY BACK MONEY NOW:
Anotherdilemma for managers of loan/debtwas how to strike a balance between being empatheticto COVID-19 impacted troubled clients and the decision to follow up on all repayments due. The shift from a functional receivable/loan collector to a more supportive and empathetic receivable/loan manager became very much grounded within mostloan management teams. There was an immediate transition from simply collecting debt to granting repayment moratorium and loan restructures to make repayments more manageable. Devising an approach to achieve these two objectives without compromising one for the other became more important than ever. The debt management strategies that workedsome few months/weeks ago before the pandemic were suddenly not functional.
In response to the effect of the pandemic on the Ghanaian economy, the Bank of Ghana came out with policy responses which did not only seek to offer financial reliefs to borrowing customers but also to support the number of interventions provided by commercial banks amidst the COVID-19 pandemic. The interventions include but not limited to:
- Guidelines on prudential treatment of credit repayment relief and loan restructuring measures by Banks;
- Guidance notes for the application of IFRS9 expected credit loss (ECL) impairment model;
- Rules on credit data submission to credit reference bureaux in accordance with COVID-19 related reliefs to borrowers.
Aside these guidelines, the crisis offers an opportunity for Banks in Ghana to undertake and/or improve structural measures. It is apparent that containment measures in the country have been relaxed even amidst the 3rd wave and hence by improving framework conditions, SME resilience and competitiveness would be enhanced. Commercial Banks in Ghana will continue to support lending and even do more by supporting policy initiatives aimed at:
- Stimulating SME digitization: it is true that the lockdown strengthened the case for providing support to SMEs to accelerate adoption of remote working and digitalization, which are regarded as key to improving their resilience. Banks continue to offer training on digital skills to business owners, entrepreneurs, and their employees by way of business development services. With the advent of Fintechs, Banks can only collaborate to compete in this digital age.
- Integrating SMEs in global value chain: the long lasting effect of the pandemic requires the creation of an incentive for public bodies to design policies to support SMEs. This is with a view to finding alternative markets and provide opportunities for them to integrate in emerging regional value chains. In this regard, deliberate stakeholder action should be geared at providing SMEs with market information and intelligence that can help them build extensive networks and thus expand and diversify their supplier base. Such information and market intelligence would also help SMEs in their internal evaluation of potential business risks and bottlenecks. Once this is achieved, Banks in Ghana will delve deeper in providing more lending products and services to address specific customer needs.
- Digitizing Trade Finance: we cannot deny the negative effect of the COVID-19 pandemic on global trade. An OECD report of 2020(46), indicated a more than 15% decline in global trade transactions and predicted that there may be further decline of about 7% in 2021. With increased digitalization of trade finance transactions, the traditional reliance on paper-based trade processes will soon be over. Observed weaknesses in paper-based trade finance processes requiring substantial in-person back office staffing would be corrected by the adoption of digital trade finance tools and techniques. Banks in Ghana can play this to their advantage and get more SME businesses to adopt these digital trade techniques and instruments.
In sum, the metamorphosing nature of COVID-19 makes it somewhat difficult for Banks to identify viable firms facing temporary financial difficulties. The financial industry appears to be awaiting how the Bank of Ghana will navigate the grey area of how and when to phase out already introduced relief measures. Notwithstanding the challenges COVID-19 brings to the financial industry, the opportunities for development cannot be downplayed. The pandemic is in to stay maybe for a long while; strategies around the opportunities identified above must be well considered and made effective to stand the test of time- staying above the curve always!
Credit:OECD scoreboard special edition- November 2020: the impact of COVID-19.
By: Kenneth Amponsah, Head, Credit Risk Management