In Ghanaian banking practice, under the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) and BoG’s Capital Requirements Directive, loan applications require thorough due diligence to ensure compliance and minimize risks. Drawing from my experience in lending at major banks like GCB Bank, I address the sub-parts below.

i. Documents for Loan Application (10 marks)

For a company like MMMMM Limited applying for a GH¢1,000,000 loan, Axis Bank Limited would request documents to assess creditworthiness, legality, and repayment capacity. Five key documents include:

1. Company Registration and Incorporation Documents: Certificates of incorporation, commencement of business, and regulations from the Registrar of Companies to verify legal existence and structure.
2. Financial Statements: Audited balance sheets, profit and loss accounts, and cash flow statements for the last 2-3 years to evaluate financial health and repayment ability, as per BoG’s credit control directives.
3. Business Plan or Loan Proposal: A detailed plan outlining the purpose of the loan (e.g., inventory purchase for groceries), projected cash flows, and repayment schedule to assess feasibility.
4. Collateral or Security Documents: Title deeds, valuation reports, or guarantees for proposed securities, ensuring they meet BoG’s guidelines on acceptable collateral under Basel II/III adaptations.
5. KYC and Identification Documents: Board resolutions authorizing the loan, directors’ IDs, and tax clearance certificates to comply with AML/CFT requirements and confirm borrower identity.

ii. Risks in Lending to Personal Customers (10 marks)

Banks face various risks when extending loans to individuals, influenced by economic volatility post-2017 cleanup and DDEP. Two key risks are:

1. Credit Risk (Default Risk): This arises when a borrower fails to repay due to job loss, illness, or economic downturns. For example, during the 2022-2024 DDEP, many personal borrowers at Stanbic Bank Ghana defaulted on loans tied to government bonds, impacting bank liquidity. Banks mitigate this through credit scoring and monitoring under BoG’s Liquidity Risk Management Guidelines, but it can lead to provisions for bad debts, eroding profitability.
2. Operational Risk: Involves errors in loan processing, fraud, or inadequate documentation, such as forged IDs in KYC breaches. In practice, at Ecobank Ghana, we’ve seen cases where personal loans were granted based on falsified income proofs, leading to losses. This risk is heightened by cyber threats under the 2020 Cyber and Information Security Directive, requiring robust internal controls to prevent non-compliance penalties from BoG.