Bad loans go past Sh500b mark for first time in June
By John Otini, August 31, 2022Bad loans crossed the Sh500 billion mark for the first time in June, setting up borrowers for property seizures in an economy suffering from inflation squeezing earnings and household budgets.
The proportion of non-performing loans (NPL) had surged to Sh514 billion by June this year, up from Sh435 billion same period last year, Central Bank of Kenya (CBK) shows in its banking sector performance indicator, putting the regulator in a dicey position.
Non-performing loans is debt which the borrower hasn’t made any scheduled payments of principal or interest for a certain period of time. In banking, commercial loans are considered nonperforming if the borrower is 90 days past due.
Tighten interest rates
Analysts now reckon that the rising loan defaults are a spanner in the works at a time CBK is trying to tighten interest rates due to surging inflation, even as bond investors also mull higher returns.
Sterling Capital’s Renardo de Souza says unfortunately, he expects the rates to remain elevated due to uncertainties around the prolonged electioneering period.
“This has been due to a number of factors such as the risk-based loan pricing model that CBK approved, the Russia-Ukraine war and high interest rates in the US,” he said.
“We don’t know how the Supreme Court will decide, it could be a re-run or a recount or something else but all this is having an impact on the economy,” de Souza added.
Local media is rife with reports of banks being in asset recovery mode due to high defaults as they try to improve the condition of the loan books. Banks in a previous survey by CBK said among their key targets this year is to reduce their bad loans which had led to several reports of auctioned properties including this week’s auction of Jubilee Party headquarters for Sh435 million by Stanbic Bank.
Kenya Association of Manufacturers says the default rate in servicing loans is due to high cost of doing business spiked by high commodity prices and a weaker shilling. This as the sector accounted for nearly half of loan defaults, according to CBK reports.
The sector’s non-performing loans climbed to Sh77.8 billion by March from Sh57 billion three months earlier.
“It is imperative that CBK has to raise rates because there are instances where it is not able to sell bonds resorting to reopening all bonds,” said John Kirimi, an independent analyst.
The analysts note that things such as high interest rates in the US and Russia are beyond the country’s control given that Kenya’s economy is exposed to external factors by 30 per cent.
“It is like a downward spiral because one thing affects the other. CBK will walk a very tight balancing act, there are things it will not be able to do such as depreciation of currencies, interest rates rises in the US,” he said.
The shilling has also been on a depreciating spree since for the last two years losing over 10 units to the US dollar exposing the country to high cost of imports. Last week Friday, the shilling hit a new low to exchange a dollar at Sh120.
Manufacturers such as Bamburi and Crown Paints are seeing earnings fall despite higher revenues due to high cost of raw materials and exchange rate laws. This means lower demand for new workers with possibly a reduction in employment.
The economic recovery after the Covid-19 outbreak saw banks push up loan issuance with private sector loan growth at 12.3 per cent by June compared to 7.7 per cent last year. There was an increase in the performance in the economy that gave banks reason to lend more.
Credit crunch
“There are aspects of credit crunch, we are not out of the woods of Covid-19 overhang and energy crisis and FX woes also meaning that those who rely on loans are paying more,” said Weslye Manambo of Genghis Capital.
Loan books of banks show significant increase on loan loss provisions from the banking side, but in terms of the broader outlook, inflation means people have less money to spend on goods and even loan repayments.