SIB tells lenders to ease loan terms on interest rate caps

Banks have to loosen their credit standards if they are to bridge the net interest income deficit arising from capped rates in the 2017 financial year, an investment bank says in a report.

In its latest banking sector update, analysts at Standard Investment Bank (SIB) say the loan caps alone are unlikely to lead to increased demand for credit, especially with the lower credit growth to the private sector in recent months, which was key in informing a 50 basis points Central Bank Rate cut last month.

SIB notes that credit standards in quarter two of 2016 were tightened in all 11 economic sectors compared to the corresponding quarter of 2015.

The report added with nearly half of the loan book in banks taken up by corporate clients — many who already enjoyed low rates — it is unlikely that there will be sufficient credit growth driven by the retail segment under the current tight conditions.

“Expectations regarding general economic activity, political risk and constraints on bank’s capital position were highlighted as key factors that contributed to the tightening of credit standards in 2Q16,” said SIB in the report.

“While banks can deliver growth by competing for corporate loans (that have acceptable risk-return trade-off) for the entire sector to grow, banks will have to loosen credit standards…since capping of lending rates effectively takes away banks’ ability to adequately price risk, over our forecast period we expect to see muted loan growth contribution from credit consumers who do not currently meet commercial banks’ credit standards.”

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Kenya has one of the highest private sector credit to GDP ratios in sub-Saharan Africa, which means it is more difficult for banks to raise the short-term loan growth needed to plug the interest income shortfall.

In July — before the rate cap — the SIB analysts had projected that net interest income for banks would decline by 9.3 per cent on average for the 2017 financial year.

They now reckon that with the rates capped and deposit rates regulated, the lenders need a 36 per cent increase in their loan books just to match the previous projection.

Central Bank of Kenya sector data shows that interest income accounted for 60 per cent of the Sh448.03 billion banks made in 2015.