Banks battle to recover debt as bad loans soar

Listed Kenyan banks, in the first quarter of 2024, faced a significant increase in non-performing loans (NPLs) primarily due to the tightening of financial conditions, which worsened the servicing of their existing loan portfolio.

According to Churchill Ogutu, a lead economist at IC Securities Ltd., the rise in NPLs could be attributed to increasingly stringent economic conditions and the widespread use of floating-rate loans.

As these conditions became more restrictive, borrowing costs escalated. This made loan servicing more challenging for borrowers, leading to a surge in NPLs.

“This was particularly true for floating-rate loans, which adjust with market rates. As these rates rose, so did the cost of servicing these loans, leading to a higher incidence of NPLs,” he said while giving  broad microeconomic perspective.

On February 6, 2024, the Central Bank of Kenya (CBK) made a significant move by increasing the base lending rate by 250 basis points, equivalent to 2.5 per cent in February.

Domestic prices

This decision was a response to the depreciation of the Kenyan Shilling against the US dollar, which was causing a rise in domestic prices. The increase in prices was impacting the cost of living and reducing purchasing power.

To curb inflation and stabilise the economy, the CBK implemented this rate hike. As a result, the new rate stood at 13 per cent, marking the highest level since November 2012. This led to higher borrowing costs and stricter lending requirements, making loan servicing more challenging for borrowers.  Consequently, NPLs surged as sectors like manufacturing, trade, and real estate struggled with repayments.

By February 2024, the NPLs to gross loans ratio rose to 15.5 per cent, indicating the significant impact of the rate hike on borrowers and the banking sector.

In terms of net NPLs, StanChart led the pack with a growth of 250.4 per cent to Sh10.5 billion, followed by Co-op at 164.5 per cent to Sh27.5 billion. Stanbic was the only bank that recorded a drop in the net NPLs at 31.3 per cent to Sh6.7 billion.

Stanbic Bank Kenya, for instance, saw its loans and advances to customers grow by a substantial 11.1 per cent to Sh255.78 billion. This expansion, indicative of a robust lending strategy, could have potentially led to a rise in NPLs.

However, the bank’s effective credit management strategies resulted in a reduction of its Gross NPLs by 17.3 per cent to Sh24.2 billion. Consequently, the NPL ratio fell to 8.6 per cent from 11.3 per cent, demonstrating the bank’s resilience in the face of economic adversity.

Loss provisions

In terms of loan loss provisions, Equity Bank led the pack with a substantial growth of 74.5 per cent, amounting to Sh6.1 billion, which represents 0.8 per cent of its total loans.

KCB Bank followed suit with an increase of 53.4 per cent, reaching Sh6.3 billion, equivalent to 0.6 per cent of its loan book.

On the other hand, NCBA Bank made the most significant cut in its provisions among the reporting banks, reducing them by 30.9 per cent to Sh1.4 billion, which accounts for 0.4 per cent of its gross loans.