BoG warns banks against using post-commencement financing to conceal bad loans

Bank of Ghana Governor Dr. Johnson Pandit Asiama has cautioned banks against using post-commencement financing arrangements to hide existing bad loans, insisting that all impaired facilities must continue to be recognised under prudential regulations.

Addressing participants at a Bank of Ghana-CIRIP Ghana forum on Tuesday, the Governor said while Ghana’s Corporate Insolvency and Restructuring Act provides statutory priority for post-commencement financing, that alone does not make lending automatically prudent.

“The priority that Act 1015 confers on post-commencement financing materially improves the position of a lender advancing funds after administration begins. But legal priority alone does not make a transaction prudent or bankable. It does not make the cash flows appear, and it does not guarantee repayment.”

He stressed that financial institutions must continue to comply with International Financial Reporting Standards (IFRS 9) and existing prudential requirements.

“Equally, the old losses do not disappear because new financing has been provided. The existing impaired facility must remain properly recognised, classified and provided for.”

He further warned, “Calling an exposure post-commencement financing cannot convert a weak loan into a good one. There can be no blanket exemption from IFRS 9 or from prudential requirements, and no automatic favourable classification simply because a facility was granted after administration commenced.”

Dr. Asiama noted that any new financing should be properly monitored, ring-fenced and linked to clear recovery milestones to ensure that viable businesses can be rescued without exposing depositors or the financial system to unnecessary risks.