Bad debts may lead to higher interest rates, says CBK

The threat of high interest rates has started rearing its ugly head in the banking industry with a notable increase in the non performing loans.

Latest data from the industry regulator, the Central Bank of Kenya (CBK) shows that the stock of gross non-performing loans (NPLs) increased by 7.1 per cent from Sh53.7 billion in March 2012 to Sh57.5 billion in June 2012.

“The high lending interest rates regime contributed to the increase in NPLs,” a report released on Monday reads in part.

The trend is also reflected in individual banks which are now increasing provisions for bad debts.

For instance, Kenya Commercial Bank (KCB) increased its provisions of bad debts by 72 per cent to Sh1.4 billion in the first half of the year.

Interest rates have averaged at over 25 per cent following the tightening of the monetary policy stance and putting pressure on abilities to repay loans.

The CBK report noted however that the quality of assets, measured as a proportion of net non-performing loans (Gross non-performing loans less provisions and interest in suspense) to gross loans improved from 1.4 per cent to 0.8 per cent over the same period.

During the period under review, 6 out of 11 sectors registered increase in NPLs by Sh 3.8 billion with Building and Construction being the only sector that registered a decline.

“However, banks continue to deploy enhanced appraisal standards to mitigate credit risk and the Central Bank is closely monitoring the trend. It is noteworthy that the financial sector is developing and deepening faster than the overall economy,” the report noted.

The banking sector grew by 9.0per cent in 2010 and 7.8 per cent in 2011 while the economy grew by 5.8per cent and 4.48per cent in 2010 and 2011 respectively.

It reckons that the growth of micro deposit accounts (accounts with average balances of Sh100,000 and below) has been a critical contributor to the development and deepening of the banking sector.

These accounts have increased from about 2.14 million in 2005 to 14.0 million in June 2012.

The number of loan accounts remains low at just over 2 million and will need to increase substantially to catalyse reduced unit costs of loans.