The volume of non-performing loans (NPLs) rose by a whopping Sh4 billion — or 7.1 per cent — to Sh57.5 billion in the three months to June as the burden of servicing loans became too heavy for more borrowers.
What you need to know:
The volume of non-performing loans (NPLs) rose by a whopping Sh4 billion — or 7.1 per cent — to Sh57.5 billion in the three months to June as the burden of servicing loans became too heavy for more borrowers.
Banks expect NPLs in personal, household and trade sectors to rise and remain unchanged for all the other sectors
High cost of loans also hit the building and real estate sectors, comprising civil works as well as commercial and residential houses, where the Central Bank says it expects an increase in default rates.
The economy expanded at the rate of 3.5 per cent in the first quarter of this year compared to a growth rate of 5.7 per cent in a similar period last year.
Bank executives agree with the assessment of credit officers on the causes of the tightening in credit standards and the subsequent rise in NPLs.
A steep rise in the cost of loans that started at the end of 2011 has left many borrowers incapable of servicing their debts, pushing up the level of default across the banking industry.
The volume of non-performing loans (NPLs) rose by a whopping Sh4 billion — or 7.1 per cent — to Sh57.5 billion in the three months to June as the burden of servicing loans became too heavy for more borrowers, according to the latest Central Bank of Kenya data.
“Banks expect NPLs in personal, household and trade sectors to rise and remain unchanged for all the other sectors,” the CBK report says.
Kenyan banks have more recently built large portfolios of personal loans that are mostly advanced to those in formal employment on unsecured terms -- leaving commercial banks with little recourse in the event of a default.
Trade loans are advanced on the strength of the borrowing business and may or may not be secured on the expectation that it will be serviced on the basis of sales. The rise in trade loan defaults is hinged on the challenging business environment that has led to a slowdown in economic growth.
The economy expanded at the rate of 3.5 per cent in the first quarter of this year compared to a growth rate of 5.7 per cent in a similar period last year. Data for the second quarter of the year is expected by the end of September.
High cost of loans also hit the building and real estate sectors, comprising civil works as well as commercial and residential houses, where the Central Bank says it expects an increase in default rates.
The majority of lenders and developers participating in the CBK survey expect lending to the building and construction sectors to drop significantly based on assumption that the newly-enacted land laws would negatively impact asset quality.
“Demand for credit decreased in real estate and building and construction sector and the trend is expected to continue in the near term,” says the CBK report.
The number of borrowers seeking credit in the building and construction sector dropped to 428 in June 2012 from 800 in March, while applications for credit in the real estate sector dropped to 402 in June from 611 in March.
“The June 2012 credit survey shows that banks have intensified their credit recovery efforts in building and construction, trade, transport and communication and real estate sectors,” the CBK report says pointing to the lenders’ discomfort with the default trends.
HassConsult, a high-end of market property dealer, says the high interest rates are gradually having an impact in the sector – reducing the supply of new houses.
“The big impact of the interest rate rise is being felt on the supply side,” said Farhana Hassanali-Hashmani, the property development manager at HassConsult.
“Nearly all developers have cut back their plans, postponed phases, or reduced the number of homes they are constructing,” said Mrs Hassanali-Hashmani.
Kenya’s lending rates rose steeply beginning October last year after the Monetary Policy Committee (MPC) raised the Central Bank Rate to 18 per cent to curb exchange rate turbulence and a spiraling inflation.
“The cost of funds rose from an average of 2.6 per cent in June 2011 to 6.2 per cent at end of June 2012, confirming the CBK’s finding that the cost of funds is the main driver of the high interest regime in the market,” the CBK report says.
Bank executives agree with the assessment of credit officers on the causes of the tightening in credit standards and the subsequent rise in NPLs.
“The non-performing loans are specific to individual banks, but one would say that higher interest rates have eroded many borrowers’ ability to service the loans, leading to deterioration of loan performance,” said Alkarim Jiwa, the finance and planning director of Diamond Trust Bank.
Mr Jiwa said the industry’s decision to reschedule the repayment periods in the wake of the steep rise in interest rates at the end of last year had minimised the potential defaults.
He said the restructuring loans started – which included rescheduling and lengthening of the repayment period – is likely to continue to curb the looming rise in non-performing loans.
Some institutions moved to reduce the level of default in the homeloans market by effecting only minimal interest rate increases even as the benchmark CBR spiraled by 11 percentage points to 18 per cent between last September and December.
“We realised that borrowers would have difficulty repaying the loans as the interest rates rose.
We raised the mortgage rate from 14 to 16.5 per cent which was much lower than the amount by which the cost of funds rose,” said Frank Ireri, the managing director of mortgage lender Housing Finance.
The CBK report also reflects the prevalent view among analysts that the deterioration in credit conditions have resulted from the high interest rates regime in the past nine months or so.
Legae Securities (Pty) Ltd, a member of the Johannesburg Securities Exchange, has concluded in its latest report that the NPL situation in Kenya is worrying.
“We remain concerned by credit risks: In spite of the system asset quality improvements, we reiterate our worries related to the divergence between system loans and NPLs’ growth,” said Legae Securities said in a report to foreign investors.
The brokerage firm added that the increase in “watch loans” – assigned to loans that have defaulted for two consecutive months – last year had the potential of resulting in more provisions this year.
“Our fears are compounded by limited structural improvements in asset quality as the NPL and suspended interest/loans ratios stabilise and/or bottom out (as well as) strong growth in ‘watch’ loans in financial year 2011 which could result in greater provisions this year onward, barring restructuring,” said the Legae Securities report.
