Banks slap risky clients with high borrowing rates

Commercial banks have ramped up the cost of loans in the wake of a recent rise in the base lending rate, leaving borrowers with a growing pain that is expected to persist through next year.

The average lending rate stood at 15.75 per cent at the end of July compared to 15.26 per cent in May, according to newly released Central Bank of Kenya (CBK) data. This means the cost of loans rose by an average of 0.5 percentage points in two months.

The lenders said the repricing does not affect all clients, but is mainly targeted at new borrowers as well as risky borrowers who took loans recently on terms that allow variation of interest rates.

The increase in the cost of loans is the result of the CBK’s May decision to raise the Central Bank Rate (CBR) and the July increase of the Kenya Banks Reference Rate (KBRR) as part of efforts to arrest the exchange rate turbulence that has persisted since March.

The CBR has been on a steady rise since April when it stood at 8.5 per cent to a high of 11.5 per cent in early July, causing the KBRR to rise from 8.54 per cent to 9.87 per cent in July – a 1.33 percentage point increase.

Bank executives said the increase in lending rates was mainly targeted “at certain portfolios so that risky ones such as personal loans are
appropriately priced.”

“Borrowers who have since become risky – say, by skipping monthly payment of loans – are also being subjected to revised rates. The basic adjustment is just the KBRR one of 1.33 percentage points,” said a bank CEO who did not want to be named.

Banks started sending notices of their intention to increase lending rate in July shortly after the CBK’s Monetary Policy Committee (MPC) increased the base lending rates.

Francis Mwangi, who heads research at Standard Investment Bank (SIB), said banks have been privately dispatching notice letters to borrowers showing the new interest rates they are required to pay but the same have not been published in the newspapers because they do not affect all clients.

“Banks have not increased interest rates for most of their clients, but are mainly targeting those with high risk of default in the wake of exchange rate turbulence and the rise in KBRR,” said Mr Mwangi.

The shilling began the year at 90.78 units to the dollar but has since lost nearly 15 per cent of its value to stand at 105.47 units to the dollar during Wednesday’s trading. The year-to-date depreciation stands at 13.9 per cent.

READ: Borrowers to feel pinch as CBK raises lending rates

The MPC reacted with a tightening of monetary policy in May and July to curb further erosion of the shilling’s value on fears it would trigger inflationary pressure.

Kenya’s core inflation – which measures the movement of consumer prices that are not driven by fuel or food – rose to 4.7 per cent in July from 3.5 per cent in May.

Besides the rise in long-term lending rates, the overdraft rate – which has a tenor of up to one year – also rose to stand at an average of 16.05 per cent in July.

Cytonn, an investment management firm, said the increase in KBRR had “resulted in an upward repricing of loans” and added that it expected lending rates to rise further when the Treasury steps up its domestic borrowing programme that is set at Sh229 billion this fiscal year.

“Intensification of domestic borrowing will further result in upward pressure on interest rates,” said Cytonn said in its latest market report.

Mr Mwangi said he expects lending rates to rise further but still targeted at certain clients based on their risk profiles and fresh increase in the KBRR.

One bank executive who did not want to be named because of the possible backlash from his customers said lending products – such as personal loans or trade – that were on variable interest rates as specified in customers’ contracts are being adjusted with the change in the KBRR.

When interest rates rise, commercial banks face higher risk of default leading to a build-up of bad debt in their books. The CBK shows that trade and personal loans account for the highest proportion of non-performing loans (NPLs).

Borrowers of trade-related loans – such as invoice discounting or importers credit – had failed to repay Sh32 billion as at the end of June, up from Sh29 billion in March.

READ: Banks exceed CBK loan targets, spur inflation rate rise

The NPLs attributed to personal or household loans stood at Sh26 billion in June, having slightly dropped from a high of Sh28 billion in March.

Bank executives said some loans – such as fixed-rate mortgages – have been left intact because a commitment was made at the beginning of the contract not to vary them.

On Wednesday, some bank CEOs said they were still waiting to see whether there would be any further increments in the base rate before making a generalised increase across all loan products.

“We view the current increase in interest rates as temporary and we will only make upward changes across all products if there is a further increase in the cost of funds and the KBRR,” said the bank executive.

SIB says in its latest banking report that the lenders have been reluctant to make aggressive lending rates increases because of stiff competition and the risk of instigating a rise in bad debt.

“Banks’ net interest margin remained under pressure as competition stifled rate increases on loans... Industry NPL ratio (six per cent) remained elevated,” said SIB.