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Borrowers default Sh73bn bank loans in era of pandemic

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Borrowers default Sh73bn bank loans in era of pandemic


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Central Bank of Kenya. FILE PHOTO | NMG

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Summary

  • New Central Bank of Kenya (CBK) data shows that the value of loans defaulted hit Sh423 billion or 14.1 per cent of the total Sh3 trillion loan book, representing a sharp rise from Sh351.73 billion that was in default by the end of March 2020.
  • The Sh71.26 billion spike in defaults between end of February and December is a stark contrast from an additional Sh5.4 billion that fell into default status in a similar period in 2019 and Sh31.1billion in 2018.
  • The jump in gross non-performing loans (NPLs) – credit for which principal or interest has not been paid for 90 days or more – is despite borrowers having applied to defer payments on more than half of current loan book.

Borrowers defaulted on Sh73.05 billion bank loans in 10 months to December alone, highlighting the gravity of the Covid-19 induced economic hardship that triggered massive layoffs and pay cuts.

New Central Bank of Kenya (CBK) data shows that the value of loans defaulted hit Sh423 billion or 14.1 per cent of the total Sh3 trillion loan book, representing a sharp rise from Sh351.73 billion that was in default by the end of March 2020.

The Sh71.26 billion spike in defaults between end of February and December is a stark contrast from an additional Sh5.4 billion that fell into default status in a similar period in 2019 and Sh31.1billion in 2018.

The jump in gross non-performing loans (NPLs) – credit for which principal or interest has not been paid for 90 days or more – is despite borrowers having applied to defer payments on more than half of current loan book.

CBK governor Patrick Njoroge yesterday said the current levels of defaults are still manageable and added that he expects the ratio to rise to 16 percent or 17 percent if economic recovery delays.

“Credit risk remains elevated and that is expected given where the economy is. We have done some analyses and assuming that the economy remains flat and the benefits of reopening the economy do not come through, NPLs will rise to 16 or 17 percent of gross loans,” said Dr Njoroge.

“Those numbers are still manageable because banks have been doing what they needed to. They needed to be conservative and make provisions for their loans.”

The huge jumps in provisioning by end of September had seen banks earnings fall sharply, with Standard Chartered Bank Kenya, Absa Kenya, Cooperative Bank of Kenya, DTB, I&M Holdings and NCBA all issuing profit warnings.

The weakening strength of borrowers to honor loan repayment coincides with the prevailing tough economic times facing households since the first case of Covid-19 was confirmed in Kenya in March, triggering job losses, salary cuts and tight purses.

The loan defaults have seen the NPLs ratio rise to 14.1 percent—the highest since August 2007—when it stood at 14.41 percent.

CBK said NPL increases were registered in the transport and communications, trade, real estate and agriculture sectors due to the subdued business environment.

The rise in NPLs comes despite banks having allowed customers to extend repayment periods on loans worth Sh1.63 trillion by end of December, an equivalent of 54.2 percent of total loan book.

Personal and household loans top the list of debt restructured (Sh333 billion) since March 18 when the CBK allowed lenders to offer relief to distressed customers after the country reported its first coronavirus infection.

Many workers who had tapped unsecured loans on the strength of their salaries to purchase of goods like furniture, cars and meet expenses like school fees have struggled to keep up with repayments in the wake of retrenchments and pay cuts.

About 1.72 million workers lost jobs in three months to June when Kenya imposed a lockdown to curb the spread of the corona virus and recovery has been slow with salary cuts persisting in many sectors.

Companies that had borrowed based on the forecast of cash flows have also been struggling to repay their bank loans, even as they differ capital projects such as launching new products or extending supply in new areas.

Dr Njoroge says the Covid-19 period has come with a silver lining since banks have had extensive one-one one discussions and now understand their customers’ risk profiles much more.

“Banks now know their customers and understand their business models a lot more instead of having some sort of generic cookie-cutter approach and therefore can price loans to each customer,” said Dr Njoroge.

Private sector credit growth stood at 8.4 percent in December—the best since August (8.3 percent)—but below April’s nine percent.

CBK said there was strong credit growth in consumer durables (18.1 percent), agriculture (15.3 percent), transport and communications (13.6 percent) and manufacturing (12 percent).

The credit growth however remained below the CBK’s target rate of 12-15 per cent, a growth viewed adequate to support economic development.

Banks had started lending to private sector at an increasing pace since the removal of interest rate cap in November 2019 but the momentum was hurt with Covid-19 pandemic.

The pace of lending to private sector had increased in four consecutive months to hit nine percent in April—the fastest pace in 34 months—but started declining as borrowers struggled to repay.



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