Banks to raise bad loan provisions by Sh2.4bn as CBK keeps closer watch
Dubai Bank branch on Kenyatta Avenue in Nairobi on August 17. PHOTO | FILE
The Central Bank of Kenya (CBK) has in the last few months compelled banks to reclassify some loans and increase provisioning for probable losses by an extra Sh2.4 billion.
According to the International Monetary Fund (IMF), the CBK has been relooking at the numbers provided by various institutions as part of stress-testing to assure itself of the soundness of the banking system.
The exercise could be intensified in the wake of the fall of a second commercial bank — Imperial — since the report was first compiled just after the collapse of Dubai Bank.
“On-site supervision efforts have intensified, and the CBK has asked banks to reclassify some of their loans and increase provisioning for credit losses (Sh2.4 billion),” said the IMF in an update on the negotiations on the Sh65 billion precautionary credit facility to the Treasury.
When CBK governor Patrick Njoroge was asked to discuss loan classification in banks during his second press conference last week, he said the regulator had taken great interest in it but added that it was “”a future concern.” This is contrary to the IMF disclosure to the effect that it was in fact a current issue.
“At an industry average of about 5.7 per cent nonperforming loans are currently not an issue in Kenya. In terms of loan classification, some institutions may not fully follow the guidelines, but it is a future concern,” said Dr Njoroge.
According to CBK’S Prudential Guidelines, loans must at a minimum be classified into five categories: ‘normal’, ‘watch’, ‘substandard’, ‘doubtful’ and ‘loss’ — which depends on the probability of being recovered.
The Bretton Woods institution goes on to say that there are several banks in focus on the issue of loan provisioning. The provisioning ensures that a bank has recognised that a loan will never be repaid and is best considered a loss in the profit-and-loss account.
“These [onsite supervision] efforts, which are continuing, have already led to a higher loan loss provisioning coverage ratio for several banks,” said the IMF.
Commercial banks face increased attention after the fall of the two banks even as the Central Bank maintains that the financial system is sound and there are no systemic threats from the fall.
The Treasury and the CBK have asked for precautionary forex facility from the IMF to be drawn only when shocks to the economy are realised and the shilling needs support. In exchange, the IMF has set some conditions including stress testing for commercial banks.
The testing involves finding out how a bank would perform under different economic and loan repayment conditions.
Analysts have noted that a number of banks have been increasing their provisioning given the expanding loan book and deteriorating economic conditions.
Nairobi-based Standard Investment Bank forecasts that Cooperative Bank’s loan loss provisions will increase to 1.1 per cent from 0.7 per cent last year.
It further projects that KCB, NIC and Diamond Trust Bank loan loss provisions will rise from 1.0, 0.3 and 0.7 to 1.3, 0.9 and 1.0 per cent respectively by the end of this year. They forecast that Barclays will retain its provisions as a percentage of average gross loans at 1.1 per cent, same as CfC Stanbic at 0.9 per cent, I&M at 0.8 per cent and StanChart at 0.8 per cent.
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