Banks pile Sh10bn bad loans in three months

Commercial banks added Sh10 billion to their non-performing loans in the first three months of the year.

The bad loans portfolio, which was at Sh117 billion as at the end of March, is largely blamed on high lending rates and a tough business environment experienced last year.

The Kenya Bankers Association (KBA) chief executive officer, Mr Habil Olaka, said the lenders have been meeting credit demand by the private investors, leading to sustained growth in the uptake of loans.

However, the increased issuance of credit has partly translated to rise in non-performing loans (NPLs).

“This credit has been channelled largely to investment and therefore has no destabilising effects such as inflation. As could be expected, the growth in credit will be accompanied by non-performing loans, which can be traced to particular sectors, notably tourism and construction,” Mr Olaka told Smart Company.

DEMAND FOR CREDIT

In a banking industry report released last week, the Central Bank attributed the trend to the “spill-over effects of high lending interest rates and challenges in the business environment in the first quarter of 2015”.

Eleven out of the 10 industries assessed by the CBK reported a surge in non-performing loans in the first quarter of this year, with the building and construction as well as real estate sectors experiencing the highest growth in the bad loans stock by 27.55 per cent and 20.49 per cent respectively.

The two segments have particularly been affected by delays in payment of contractors by the government.

Although NPLs shot up, there was increased demand for credit with banks issuing loans worth Sh2.04 trillion in the first three months of this year, compared to Sh1.97 trillion at the end of last year.

The bankers association says increase in credit can be attributed to a general decline in lending rates. 

The average lending rate has declined to the current  15.46 per cent from an average of 17 per cent in January 2014.

“This trend is likely to be sustained so long as the market dynamics of macro-economic stability, competition and continuous measures being put in place to improve the general operating environment for the borrowing businesses and households,” Mr Olaka said. 

Tourism reported decreased demand for credit in the first three months of this year due to insecurity. As a result, tourist arrivals and earnings from the sector declined. Kenya’s traditional source markets — US and Europe — have issued travel advisories because of insecurity.

Even with increased uptake of loans in many sectors, credit risk remains the single largest factor affecting the stability of banks and the financial system as a whole. This is because lending remains the core business of banks. 

SCREENING BORROWERS

In the first quarter of 2015, banks tightened credit rules for tourism, real estate and building and construction sectors while those for the trade and personal/household segments were eased.

“Increased insecurity, bank’s capital position, balance sheet constraints, political risk and cost of funds were cited as the main driving factors for banks tightening their credit standards,” the CBK said in a credit survey report released earlier this month.

Against the backdrop of growing bad loans, banks are increasingly tightening credit appraisal standards in a bid to mitigate risk. 

Since the launch of the first Credit Reference Bureau in February 2010, banks and their customers have used the credit information sharing system for loan appraisal.

By the end of the first quarter of this year, banks had accessed 5.6 million credit reports while customers had accessed over 96,000.