Non-performing loans on the rise, banks feeling the pinch

Businesses and households are defaulting on their payments due to high interest rates and reduced government spending. TEA Graphic 

By JOINT REPORT The EastAfrican

In Summary

• Banking data shows that the volume of NPLs has been rising over the past nine months, as businesses and households struggle to meet their repayment schedules, weighed down by a mix of high interest rates and reduced government spending in the first half of the year.
• Latest data by central banks in Kenya, Uganda, Rwanda and Tanzania, however, shows that the ratio of NPLs to total loans is declining, albeit slowly.
• The rise in NPLs is expected to put pressure on banks to be more cautious in lending as well as tighten the noose on borrowers already holding loans.

 

Commercial banks across East Africa are feeling the weight of costly loans as a high interest rate regime coupled with new regulatory requirements drives up the volume of non-performing loans (NPLs).

Banking data released by regulators and several big banks in the region shows that the volume of NPLs has been rising over the past nine months, as businesses and households struggle to meet their repayment schedules, weighed down by a mix of high interest rates and reduced government spending in the first half of the year.

Lending rates in Kenya currently average 16.96 per cent — the lowest level since October 2011 — a level analysts consider to still be high given that at at 8.5 per cent currently, the Central Bank Rate is half that figure. The CBR is what banks should benchmark their interest on loans.

READ: Era of cheaper money here as rates hit two-year low

Latest data by central banks in Kenya, Uganda, Rwanda and Tanzania, however, shows that the ratio of NPLs to total loans is declining, albeit slowly.

The CBK said on Wednesday the figure declined from 5.3 per cent in August to 5.2 per cent in September, an indication of lower credit risk.

New CBK requirements have also forced the country’s lenders to increase their NPL figures in light of loan grading standards introduced by the regulator. Loans are officially classified as non-performing if they are not serviced for a period exceeding three months.

Data from the Bank of Uganda (BoU) on the other hand shows NPLs continued on a downward trend, to 3.9 per cent of total loans in the last quarter of the 2012/13 fiscal year, from 4.7 per cent the previous quarter.

READ: Ugandan banks brace for higher loan defaults, drop in profits

Rwanda ratios

In Rwanda, the central bank — the National Bank of Rwanda (NBR) — said the ratio of NPLs to total loans increased slightly to 6.9 per cent at the end of June this year compared with 6.7 per cent and 5.8 per cent at the end of December 2012 and June 2012 respectively.

The Bank of Tanzania, on the other hand, said the ratio of NPLs to gross loans decreased to 7.8 per cent in March this year from 8.3 per cent in June last year.

Bankers say that aid cuts in Rwanda and Uganda, as well as the March general election in Kenya, affected the government payment cycle, forcing a sizeable portion of the region’s SMEs to revise their loan repayment schedules.

In Rwanda, for example, interest rates started on the high end this year, as government turned to domestic borrowing to bridge the shortfall in donor funding.

“There will be a spike this year — the payment cycle of government contracts was extended slightly in the first quarter and, therefore, many people did not catch up,” said Lawson Naibo, the chief operating officer of the Bank of Kigali.