Defaults on bank loans up Sh45bn in Covid-19 curbs era

Data from the Central Bank of Kenya (CBK) shows that non-performing loans (NPLs) rose to Sh394.4 billion in August. FILE PHOTO | NMG

By JOHN MUTUA
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Summary

• Data from the Central Bank of Kenya (CBK) shows that non-performing loans (NPLs) rose to Sh394.4 billion in August, up from Sh349.9 billion at the end February — the sharpest six-month increase in recent history.
• The ratio of NPLs rose from 12.7 per cent in February to 13.6 per cent — the highest since August 2007 when it stood at 14.41 per cent.
• Firms that had borrowed based on the forecast of cash flows have also been struggling to repay their bank loans.

Workers and businesses defaulted on loans worth Sh45 billion in the six months to August when Kenya imposed stringent measures to contain the spread of the coronavirus.

Data from the Central Bank of Kenya (CBK) shows that non-performing loans (NPLs) rose to Sh394.4 billion in August, up from Sh349.9 billion at the end February — the sharpest six-month increase in recent history.

The NPL growth emerged in a period when Kenyans deferred payments of 38 percent of the bankers’ total loans or Sh1.12 trillion, a pointer that defaults — which is credit that remains unpaid for more than 90 days — could have been worse without the credit rescheduling.

The ratio of NPLs rose from 12.7 per cent in February to 13.6 per cent — the highest since August 2007 when it stood at 14.41 per cent.

Industries and other businesses have since cut down on their activities in response to the infectious disease, leading to job cuts and unpaid leave for retained staff as profitable firms move into losses.

This has seen workers who had tapped mortgages and unsecured loans for purchase of goods such as furniture and cars and expenses like school fees default. Unsecured loans are given on the strength of one’s salary.

Firms that had borrowed based on the forecast of cash flows have also been struggling to repay their bank loans.

“The NPL increases were noted in the real estate manufacturing, personal sectors and transport and communication sectors due to a subdued business environment,” said the CBK.

The subdued private sector credit growth showed recovery in August, but lending remains below the CBK limit as banks ease credit, fretful of defaults and the second wave of loan restructuring applications as the financial crisis persists.

CBK data shows credit to private sector expanded by 8.3 percent in the year to August to hit Sh2.9 trillion compared with a rise 7.61 per cent in the year to June.

Private-sector credit growth should be in the region of 12 to 15 percent to support economic growth.

“The imminent operationalisation of the credit guarantee scheme will de-risk lending by commercial by commercial banks,” said CBK.

Kenya will set up in October the credit guarantee scheme for small and medium-sized businesses hit by the coronavirus, and its capital will eventually rise to at least Sh100 billion.

In late May, the central bank had said such businesses needed urgent help to survive, saying that many were at risk of closing at the end of June if they received no help.

The defaults also came in a period when banks restructured loans have crossed the trillion shilling mark in what is set to ease the pain for borrowers and avoid a sharp increase in defaults.

The restructuring involved non-payment of loans for up to three months and extension of credit tenures, which translates to lowering of monthly repayments.