Banks raise loan default alarm on spiralling rates

What you need to know:

Lending rates have in recent weeks risen to highs of 27 per cent from 19 per cent at the beginning of the year following a more than doubling of the cost at which the government is borrowing from the local market — now standing at 23 per cent.

Banks have raised the alarm on rising risk of mortgage and personal defaults due to the increase in lending rates and the government’s delayed payments to contractors.

Credit officers from 40 banks told the Central Bank of Kenya in an October survey that defaults looks set to be highest on loans issued to individuals and real estate investors.

The two segments will be hit hardest by the recent increase in lending rates and slow payment of contractors by government grappling with low revenues.

Lending rates have in recent weeks risen to highs of 27 per cent from 19 per cent at the beginning of the year following a more than doubling of the cost at which the government is borrowing from the local market — now standing at 23 per cent.

“Banks foresee increasing NPLs (non-performing loans) in the personal/household, building and construction, manufacturing, real estate, agriculture and trade sectors,” said CBK.

“Increased interest rates, volatile exchange rates, delayed contractor payments from the central and county governments and adverse weather conditions were cited as some of the factors attributable to increased NPLs.”

About 63 per cent of the credit officers surveyed expect higher defaults in the personal loans segment while 46 per cent expect those who borrowed for construction projects to struggle with repayments.

Only 28 per cent of the officers expect players in the tourism sector to struggle with loan repayment despite a slump in the sector devastated by terror attacks.

The increments in loans follow a rise in the cost of government borrowing in the past two months as the Treasury’s appetite for money increased with the Kenya Revenue Authority’s failure to meet its revenue collection targets.

The bond auction results show that the Treasury was offering investors 23 per cent return on money lent to government for one year up from 10.6 per cent in January, resulting in a steep rise in the cost of funds for commercial banks.

Large depositors have in recent weeks demanded that the lenders match the Treasury’s risk-free rate for deposits, causing a sharp increase in the price of loans for old and new borrowers as the banks move to protect their profit margins.

But the 91-day Treasury bills fell to 9.654 per cent at Thursday’s auction from 13.763 per cent last week.

This has raised hopes of lower lending rates with the CBK telling commercial banks to reduce loan rates in line with the current market situation.

Bankers may intensify recovery efforts from the high risk segments to ease the impact of the defaults on the lenders profitability.

“Some banks aim at intensifying monitoring of loan accounts through regular review of accounts and customer visits to enable banks detect early warning signs and address them,” said the CBK. Lending to individuals and the construction sector grew by the highest margins in the three months to September.

Construction sector was up Sh32 billion to Sh444 billion while personal loans rose 27.7 billion to Sh567.7 billion. The Value of NPLs stood at Sh123.9 billion from loans of Sh2.17 trillion in September.