Memoire Online - Problem loans management practices : Ecobank Ghana Limited as a case study

The WAMU Banking Commission defines `impaired loans¹⁴' as all loans that are not repaid

under the pre-agreed terms and conditions. It recommends that such loans must be clearly identified and isolated from the bank's books for a specific treatment. All loans with either high or low risks of non-recovery must be watched and an internal reporting system to the Managing Director must be initiated. This will foster Senior Management involvement and guidance in the close monitoring and management of the stressed accounts to lessen the financial effects on the bank.

Loans classification system and provision requirements differ as the case may be:

· Direct risks or signatory commitments taken on the State and its fellows: optional provision.

· Risks guaranteed by the State: it is suggested, but not demanded, to make provisions

up to the amount of the guaranteed debt (principal and interest) over a maximum period of 5 years, if the risks covered are not taken into account in the State budget.

· Private risks not guaranteed by the State: the following table summarizes the loans

Classification	Loan Classification System	Provision Requirement
*Unpaid debts*	Debts overdue for a period not exceeding 6 months and that have not been extended or renewed.	Optional
*Immobilized debts*	Debts overdue for a period not exceeding 6 months and the repayment is unlikely due to reasons beyond the borrower's control. Debts restructured and that the repayment terms are respected.	Optional
*Doubtful or contentious debts*	Debts overdue or not but presenting probable or certain risks of part or full non-recovery. Debts that have registered at least one unpaid of at least 6 months. Debit accounts without any creditor movement for a period over 3 months. Debit accounts without any significant creditor movement for a period over 6 months.	- Assets not secured: 100% provisioning - Assets secured by collateral: optional provision for the first 2 years, 50% the 3^rdyear and 100% the 4^th year. -
*Uncollectible debts*	Assets considered uncollectible after the bank has given up all efforts either amicably or legally.	Uncollectible debts are accounted as losses for their full amount.
*Country risks*	Off-balance sheet debts and undertakings on public and private debtors	Provisioning is let at the discretion of banks but interests must be fully provisioned if due over 3 months.

4. Bank of Ghana

Category	Loan classification system	No. of days of delinquency	Provision
*Current*	Advances in this category are those for which the borrower is up to date (i.e. current) with repayments of both principal and interest. Indications that an overdraft is still current would include regular activity on the account with no sign that a hardcore of debt is building up.	0 - less than 30	1%
*Other loans especially mentioned ("OLEM")*	Advances in this category are currently protected by adequate security, both as to principal and interest, but they are potentially weak and constitute an undue credit risk, although not to the point of justifying the classification of substandard. This category would include unusual advances due to the nature of the advance, customer or project, advances where there is a lack of financial information or any other advance where there is more than a normal degree of risk.	30 - less than 90	10%
*Substandard*	Substandard advances display well-defined credit weaknesses that jeopardise the liquidation of the debt. Substandard advances include loans to borrowers whose cash flow is not sufficient to meet currently maturing debt, loans to borrowers which are significantly undercapitalized, and loans to borrowers lacking sufficient working capital to meet their operating needs. Substandard advances are not protected by the current sound worth and paying capacity of the customer. Non-performing loans and receivables which are at least 90 days overdue but less than 180 days overdue are also classified substandard. In this context advances become overdue when the principal or interest is due and unpaid for thirty days or more.	90 - less than 180	25%
*Doubtful*	Doubtful advances exhibit all the weaknesses inherent in advances classified as substandard with the added characteristics that the advances are not well-secured and the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the advance, its classification as in estimated loss is deferred until its more exact status may be determined. Non-performing loans and receivables which are at least 180 days overdue but less than 360 days overdue are also classified as doubtful	180 - less than 360	50%
*Loss*	Advances classified as a loss are considered uncollectable and of such little value that their continuation as recoverable advances is not warranted. This classification does not mean that the advance has absolutely no recovery value, but rather it is not practical or desirable to defer writing off this basically worthless advance even though partial recovery may be effected in the future. Advances classified as a loss include bankrupt companies and loans to insolvent firms with negative working capital and cash flow. Banks should not retain advances on the books while attempting long-term recoveries. Losses should be taken in the period in which they surface as uncollectible. Non-performing loans and receivables which are 360 days or more overdue are also classified as a loss.	360 and above	100%

Problem loans management practices : Ecobank Ghana Limited as a case study

3. West African Monetary Union

4. Bank of Ghana