Interest rates push bad loans to Sh100bn

Central Bank of Kenya (CBK) Governor Prof Njuguna Ngung'u during the National Digital Registry Service Financial Services Sector briefing at Serena Hotel on October 23, 2014. As Prof Njuguna Ndung’u exits from the Central Bank of Kenya, we must insist that the new governor builds on Prof Ndung’u’s success. PHOTO | DIANA NGILA |

By  JOSHUA MASINDE

What you need to know:

  • The Central Bank of Kenya (CBK) August Monthly Economic report released this week says the value of gross non-performing loans (NPLs) grew by 26.1 per cent from Sh79.4 billion in August 2013 to Sh100.1 billion in August 2014.
  • Growth in NPLs is, however, almost in tandem with a 22.8 per cent increase in loans and advances to Sh1.8 trillion by end of August 2014 from Sh1.49 trillion at the end of a similar period last year.

Bad loans hit Sh100 billion in the year to August 2014 as high interest rates and slowdown in the economy hurt the banking industry.

The Central Bank of Kenya (CBK) August Monthly Economic report released this week indicates the value of gross non-performing loans (NPLs) grew by 26.1 per cent from Sh79.4 billion in August 2013 to Sh100.1 billion in August 2014.

“The increase in NPLs is partly attributed to spill-over effects of high interest rates experienced in 2012 and lag-effects of reduced economic activities before and after March 2013 General Election,” the CBK said.

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This alarming trend is a headache to credit officers who have intensified loan recovery efforts to rescue an already worsening situation.

Banks derive much of their revenue from lending and deterioration in the quality of the loan book is a big threat to the banking business.

PAYMENT DELAYS

Analysts further attribute the trend to delays in government payment to contractors, especially in the construction industry.

“Most of the banks lend to contractors and government suppliers. Any delay in disbursement of funds may lead to an increase in non-performing loans,” said Old Mutual research analyst Eric Munywoki.

Growth in NPLs is, however, almost in tandem with a 22.8 per cent increase in loans and advances to Sh1.8 trillion by end of August 2014 from Sh1.49 trillion at the end of a similar period last year.

Increased borrowing by households, trade, manufacturing, transport and communication and real estate sectors led to an upswing in credit uptake in the period under review.

The ratio of gross NPLs to gross loans increased to 5.4 per cent in August 2014 from 5.3 per cent in August 2013, which is unhealthy for the banking industry.

CHASING DEFAULTERS

Mr Munywoki said a ratio above five per cent should worry banks, which have intensified credit standards and recovery to lessen the negative impact of bad debts.

In a Credit Officer survey for the quarter ended September 2014 by the CBK, banks made known their intention to go after defaulters more aggressively this quarter especially in the tourism, building and construction, mining and quarrying and real estate sectors, which are the worst affected.

Borrowers in the personal/household and manufacturing segments are also being pursued.

Sector balance sheet expanded by 20.3 per cent to Sh3 trillion in the year to August 2014 from Sh2.5 trillion in the same period in 2013.

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