Banks expect loan default increase on high interest rates

Commercial banks expect non-performing loans to increase during the year due to higher interest rates, government cash-flow problems and tough economic conditions.

In a survey conducted by the Central Bank of Kenya (CBK), 46 per cent of credit officers polled said they expected more defaults during the year compared to 32 per cent who predicted improved loan servicing.

“The expected increase in NPLs in quarter one of 2016 may be attributed to various factors including high cost of funds resulting in higher financing costs coupled with a slump in economic activity, which may hamper performance of companies,” reads part of the CBK credit officers’ survey report.

As at end of last September Sh124.8 billion or 5.4 per cent of the industry total loan book was classified as non-performing.

A debt is classified as non-performing when it is not serviced for more than three months.

The volume of non-performing loans has more than doubled since 2011 when the bad book was at Sh53 billion.

READ: Banks raise loan default alarm on spiralling rates

A faster growth in lending has kept the proportion of the total loan book classified as bad.

An increase in non-performing loans has a negative impact on banks profitability as they are required to set aside some cash covering the risk of default. The provisions are accounted for as operating expenses in a lenders’ books thereby eating into the profit.

Credit officers said the Treasury could experience cash-flow constraints, which have previously hurt the quality of loans issued to contractors for government projects.

The Kenya Revenue Authority has been experiencing challenges in meeting revenue targets during this period of poor business performance forcing the Treasury to look for alternative ways to fund the budget.

“Other respondents envisioned that due to depreciating Kenya Shilling, importers will probably reduce their merchandise or raw materials importation resulting in reduction in profit which would lead to rise in NPLs,” said the CBK.

Bankers said they would be more aggressive in their debt collection in the first three months of the year to protect their books.

Some borrowers in Kenya have loans from multiple lenders forcing banks to compete amongst themselves to ensure their debt is repaid first.

Financial surveys have revealed companies tend to be selective in their defaulting prioritising bankers whom relationship they treasure and the aggressive ones.