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Date published: Publisher: Bank of Ghana; Title: Global financial stability report October Financial stress and deleveraging: Microfinancial. Prof. K.A. Osei. Date. (Supervisor). University of Ghana mawatari.info Again, according to the September, Financial Stability Report of the. Sep 18, Copies of the Financial Stability Review may be obtained from the Bank at a cost Date. Mailing address details (please complete as fully as possible): Ghana,. Recent banking problems in major economics. (1) Systemic.
Ultimately, introducing differentiated products or services are needed to sustain growth and profitability. To this end, it calls for banks to recapitalise — so as to absorb massive economic shocks and significantly contribute to real growth of the economy. It entails increasing the debt stock of the company or issuing additional shares through existing or new shareholders or a combination. Whichever form it takes, the results should reflect increased long term capital stock to meet exigencies scalable to economic trends.
Moving on, there are insights we could draw from the sub-region, particularly Nigeria that could serve as a useful guide to the Ghanaian context. These banks were on the brink of collapse following reckless lending and poor management practices that had crept deeply into the fabric of the Nigerian banking system.
Further research held the view that banking sector reforms and recapitalisation agenda initiated by the regulator were a necessary intervention as a deliberate policy response to correct perceived or impending banking sector crises and subsequent failures. Sanusi, then governor of the Central Bank of Nigeria, also confirms that this initiative was an expensive exercise that involved several bailouts, mergers, and high-level firing at major institutions.
Amongst several other interventions was the establishment of the Asset Management Corporation of Nigeria AMCON which saw to the N11bn sale of non-performing loans from the books of commercial banks to preserve and restore stability in the Nigerian financial system. In Ghana, prior to the re-capitalisation exercise, banks were vulnerable to major swings caused by unpredictable macroeconomic indicators.
A number of banks with a small capital base within the system stood the risk of diluting the franchise value of banks and generally increased instability. With hindsight from the Nigerian situation, the Bank of Ghana as part of its Universal Banking resolution which started in issued a new directive in that required all the twenty six banks in Ghana as atto operate within a certain minimum capital requirement.
They asserted it would open up the financial market to foreign interests, very much to the detriment of local banks. Fourth quarter performance indicators post policy directive in saw local banks with significant financial muscle — arrange takeovers, right issues, private placements, mergers and acquisitions. The stock exchange interestingly, was not a major option for most of these banks as they viewed it as lacking liquidity and market depth coupled with bureaucratic procedures involved in getting listed on the Accra bourse.
Fast forward, the Central Bank now stipulates — new entrants into the banking space have to be selective and well managed with the necessary prudential supervision vigorously enforced to safeguard systemic stability. While it is reasonable to take account of collateral in provisioning, a conservative approach should be adopted, reflecting various constraints in valuing, accessing, and disposing of collateral.
In particular, the value of collateral should reflect changes in market conditions, the costs of sale, and delays in realizing proceeds etc. Furthermore, collateral should be periodically valued by reliable and independent third parties and subject to enhanced supervisory scrutiny. In the case of real estate, banks should obtain sound appraisals of the current fair value of the collateral from qualified professionals. Strengthen capital requirements to encourage asset disposal. In some cases, the combination of realistic provisioning, conservative collateral valuation, and stronger valuation may reveal that certain banks are insolvent, in which case regulators should encourage these banks to exit the market.
Enhance prudential oversight- Banks with NPLs above a set threshold for example, 10 percent should be subject to a more intensive oversight regime to ensure that they conservatively recognize and proactively address asset quality problems. Prudential reporting requirements for NPL portfolios should be significantly enhanced through detailed submissions on a quarterly or more frequent basis.
For banks with high NPLs, BoG could agree with banks on operational targets for NPL resolution and introduce standardized criteria for identifying nonviable firms for quick liquidation and viable ones for restructuring. Require banks to develop internal NPL management capabilities. Banks should be encouraged to develop a comprehensive NPL management plan, which determines rules and work practices for NPL resolution, such as 1 removing impaired loans from regular loan servicing and adopting specific tools for early arrears, 2 conducting risk scoring to set case prioritization, and 3 developing a customer charter to cater for hardship and sensitive cases, subject to clearly defined implementation targets.
Disclosures could usefully include the accrual treatment for NPLs. Insolvency and debt enforcement reforms Strengthen incentives for viable but distressed debtors and creditors to participate in meaningful restructuring.
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The legal framework should consist of both legal tools designed to facilitate speedy in- and out-of-court solutions and an adequate institutional framework including courts and insolvency practitioners to support the consistent, efficient, and predictable implementation of the laws.
More specially, authorities should: Enable the rapid exit of nonviable firms and the rehabilitation of viable firms. Augment out-of-court frameworks with hybrid features.
International practice suggests that out of- court debt restructuring generates more rapid and cost-effective results, especially if the restructuring occurs against the backdrop of strong insolvency procedures. Out-of-court frameworks that use hybrid and enhanced features, such as a stay on creditor actions, majority voting, mediation or arbitration, or a coordinating committee, achieve the best results. Strengthen debt enforcement and foreclosure processes.
Enforcement and foreclosure processes should be simplified and streamlined for example, to clearly specify enforceable titles, limit appeals, set short preclusive deadlines to enable a swift process.
Out-of-court enforcement and foreclosure should be considered where appropriate. Improve the institutional framework. The judicial system should be strengthened by increasing the specialization of judges and establishing special benches for commercial or insolvency matters. The performance of professionals such as insolvency practitioners or bailiffs should be properly supervised and adequately monitored. The fee structure should incentivize the rapid return to the productive value of business assets and be performance based.
External NPL management and distressed debt markets Foster the development of markets for distressed assets to facilitate the disposal of NPLs, recognizing market infrastructure as a crucial constraint Access to timely financial information on distressed borrowers, collateral valuations, and recent NPL sales are critical for the development of an active market for NPL restructuring.
Facilitating the licensing of nonbanks for restructuring, as opposed to entities with a banking license, would lower the cost of entry into this market and allow for greater specialization.
Use of specialist NPL servicing and legal workout agencies, and more efficient collateral auctions would help raise recovery values Asset management companies AMCs or other special-purpose vehicles could help kick-start a market for distressed debt. First, they bring economies of scale, which may help smaller banks in particular resolve problem loans.
For example, centralizing impaired assets from several banks into an AMC may help reduce the fixed cost of asset resolution, increase the efficiency of asset recovery, and allow for a more efficient packaging of assets for sale to outside specialist investors.
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Second, and relatedly, AMCs are likely to enjoy greater bargaining power due to their size, especially when loans are scattered within the system, collateral is pledged to multiple creditors, and the size of debtors is large relative to that of banks.
Third, they encourage specialization by enabling banks to focus on new lending while allowing the AMC to concentrate on the recovery of impaired assets. This division of labor becomes increasingly important if NPLs are at systemically high levels and for smaller banks, which lack workout expertise and resources.
Fourth, increased specialization can facilitate better valuation and credit discipline. The transfer of NPLs entails a separation of the loan administration away from their credit officers, which could foster a more objective assessment of credit quality. Finally, all these points together suggest that AMCs could be crucial to price discovery. Economies of scale, central bargaining power, and better valuation are likely to be key to solving the problem of collective inaction, thereby bridging the pricing gap in situations where no market exists, or the market is extremely illiquid.
AMCs could be private or public. Larger banks may be in a better position to establish their own private AMCs. However, for smaller banks or in cases of market failure due to significant structural constraints or where NPLs have reached systemically high levels, consideration could be given to a national-level AMC with public participation.
In either case, AMCs should be 1 complementary to other NPL resolution strategies such as loan workouts in separate bank unit or bank-specific AMCs ; and 2 combined with strict supervisory policies, robust insolvency frameworks, and the removal of obstacles to NPL resolution as described in the previous sections. Good governance and transparency are crucial to the success of AMCs.
In cases of public participation, it would be necessary to ensure that the AMC operates as an independent entity and has a clear mandate to maximize the recovery value of assets. For instance, an AMC should not be set up as a unit within a central bank or a subsidiary thereof. Support measures The three-pillared strategy described above should be underpinned by support measures that cut across pillars, such as improving access to information and reforming tax regimes.
Asset registers that record real estate, vehicle, machinery and equipment ownership should contain sufficiently granular information to facilitate reliable wealth assessments. Authorities should also ensure that such repositories are centralized, electronic, accessible to private sector agents, and economical.
Improved links between asset registers and credit bureaus across national borders are needed in some regions to fully capture wealth and debt abroad.
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Deploy debt advisory services so debtors are well informed and confident to engage with creditors. Households should have access to free or subsidized budgeting and legal advice services to ensure they are aware of their options and are comfortable discussing them with creditors. Micro and small enterprises should have access to institutes of credit management to ensure sufficient understanding of debt and supply chain credit management. Implementation of such services for both households and small businesses would greatly benefit from the establishment of a qualification or profession for debt counselors.60th Anniversary celebration of the Bank of Ghana
Reform tax rules to encourage NPL resolution. The credit hierarchy that applies to secured and unsecured private creditors and public authorities should be modified as necessary to ensure that all creditors are broadly and equally incentivized to support debt restructuring as well as enforcement and liquidation options. Tax rules should be reviewed and amended in areas where creditors are discouraged from provisioning or writing off loans or from selling any underlying collateral.
Tax rules that inhibit debtors from accepting debt restructuring or write-off deals should also be amended. Conclusion Reducing the level of impaired assets is essential for restoring the health of the banking sector and supporting credit growth in Ghana. High NPLs hold back credit supply by locking up capital that could be used to support fresh lending. And low write-off rates hinder necessary corporate restructuring and prolong the debt overhang, depressing credit demand.
Given that impediments to NPL resolution are often interlinked, a comprehensive strategy is needed to address the NPL problem.