Rethinking NPL clients: A case for smart recovery

By Michael Kofi Fosu

In Ghana’s banking sector, a customer classified as a Non-Performing Loan (NPL) client is often treated as a liability to be contained rather than a business to be revived. The label carries stigma. Once a borrower falls behind on repayments, doors to additional credit and constructive engagement tend to close swiftly.

Yet this conventional approach may be undermining both banks and the wider economy.

The real drivers of NPLs

Non-performing loans in Ghana have, in recent years, largely reflected macroeconomic stress rather than widespread borrower recklessness. High inflation, sharp currency depreciation, rising interest rates and broader economic volatility have severely strained business cash flows.

Industry estimates suggest that as much as 60–70% of NPLs can be attributed to adverse economic conditions, with the remaining 30–40% linked to weaker credit assessment, management shortcomings, insufficient collateral or deliberate default.

This distinction matters. If a majority of distressed loans stem from systemic shocks rather than wilful mismanagement, then a purely punitive recovery approach is unlikely to deliver optimal outcomes.

The overall NPL ratio in Ghana has hovered around 10% in recent periods — well above the Bank of Ghana’s 5% prudential threshold. Elevated NPL levels weaken bank balance sheets, constrain lending capacity, erode profitability and reduce liquidity. In short, unresolved NPLs limit banks’ ability to support economic growth just when it is most needed.

The cost of stigma

When a borrower is labelled “non-performing”, engagement often deteriorates. Communication breaks down. Legal posturing replaces commercial dialogue. Assets are repossessed and liquidated — frequently at distressed values — and businesses collapse.

This traditional model of recovery may yield short-term write-downs, but it can destroy long-term value. It also contributes to job losses and reduces productive capacity in the economy.

More importantly, once a business collapses, the bank rarely recovers the full value of its exposure. In many cases, poor pre-loan credit assessment compounds the problem, leaving recoveries permanently impaired.

The question, therefore, is not simply why NPL clients should be denied further credit — but whether, in certain cases, carefully structured additional support could improve recovery outcomes for both lender and borrower.

A modern recovery framework

This is where a more strategic, third-party-led recovery model becomes relevant.

ITFP Ghana and its partners advocate a modern, commercially driven recovery approach aligned with the Bank of Ghana’s broader objective of reducing non-performing assets, unlocking trapped funds and strengthening banking sector liquidity.

Rather than pushing distressed borrowers directly towards insolvency, the model focuses on:

• Asset tracing, valuation and strategic monetisation to maximise recovery value
• Local attachment and structured liquidation where necessary
• Debt restructuring and renegotiation of terms, including extended repayment periods or adjusted interest rates
• Facilitating dialogue between creditor and debtor to rebuild trust
• Educating borrowers in financial management and governance best practice

In some complex cross-border cases, this may involve the relocation, refurbishment or dismantling of high-value assets for sale or lease at optimal market value. In others, it may require managing convertibility and transferability issues, restructuring stranded portfolios or negotiating multi-creditor settlements.

The objective is not to shield defaulters from responsibility. It is to preserve viable businesses, recover maximum value for banks and avoid unnecessary economic destruction.

The value of an intermediary

When a loan defaults, relationships often become adversarial. Creditors, particularly in the presence of legal counsel, may struggle to maintain open dialogue with distressed borrowers.

An experienced third party can ease tensions and create space for constructive engagement. Debtors frequently speak more candidly to intermediaries than to their lenders. Commercial settlements rarely materialise quickly; persistence, technical expertise and sustained negotiation are essential.

Banks, constrained by internal resource limitations and regulatory pressures, may not be able to dedicate sufficient time and specialist capacity to complex recoveries. A structured recovery partner ensures consistent oversight, milestone tracking and, where beneficial, a coordinated “club” approach among multiple creditors.

Where insolvency becomes unavoidable, outcomes depend on factors such as secured versus unsecured status and position within the debt waterfall. Even then, extrajudicial negotiations and strategic asset attachment can improve recoveries and reduce cost.

Recovery as economic policy

Effectively managing NPLs is not merely a balance sheet exercise. It is central to financial stability and economic recovery. Banks burdened by high NPL ratios face reduced lending capacity, weakened profitability and diminished resilience.

Conversely, unlocking distressed assets and reviving viable businesses restores liquidity, supports employment and enhances credit expansion.

The pressing question for Ghana’s financial sector is this: should viable enterprises be allowed to collapse when structured recovery solutions exist?

A modern, collaborative approach to NPL management — grounded in commercial pragmatism rather than stigma — can transform distressed loans from dead weight into renewed opportunity. For banks, borrowers and the wider economy, the dividend could be substantial.

The writer is the  CEO ITFP

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