Economy

KRA puts rogue bankers on notice over insider loan taxes

JOHN

Kenya Revenue Authority (KRA) commissioner-general John Njiraini. PHOTO | FILE

The Kenya Revenue Authority (KRA) has fired a warning shot at banks warning that they will be denied tax deductions on bad loans that are issued irregularly or those not fully secured.

The KRA’s policy action comes as a number banks struggle with a pile-up of non-performing loans partly informed by insider lending practices, prompting tough action from the Central Bank of Kenya (CBK).

Three banks collapsed in a span of nine months egged on by rogue and greedy directors who secretly lent themselves billions of shillings of depositors’ funds, breaching banking regulations.

“In respect of the banking sector, KRA has taken the position that bad debts occasioned by lending practices inconsistent with CBK prudential guidelines shall not qualify for deduction for tax purposes,” KRA commissioner-general John Njiraini said in a statement.

“For this reason, banks shall not be permitted to enjoy tax deductions for loans arising from irregular insider lending or loans for which inadequate collateral was secured.”

The announcement comes in the wake of banks reporting a growing mountain of non-performing loans (NPLs).

Banks are required to set aside cash, which is deductible as an expense, to ensure they are able to absorb any losses incurred from loan defaults.

This reduces the cash amount on which tax is applicable, denying the KRA revenues.

Chase Bank, now under receivership, National Bank and Bank of Africa are some of the lenders that reported spikes in bad loans last December, plunging them into losses.

Chase Bank reported bad loans of Sh11.8 billion in December up from Sh4.5 billion in September while defaults at National Bank ballooned by Sh5.3 billion to Sh11.7 billion in the three months.

READ: Bank sector loan defaults hit a ten-year high of Sh176 billion

Overall, gross NPLs in 2015 hit Sh139.4 billion from Sh108.3 billion in 2014 — representing a 28.7 per cent growth or an increase of Sh31.1 billion.

Imperial Bank went down with Sh58 billion of depositors’ funds due to theft by executives while Chase Bank was placed under CBK management due to unsecured irregular lending to some directors.

The National Bank fired chief executive and three other executives amid allegations that the lenders books were cooked to present a rosy picture to shareholders.

At the end of March this year, the gross NPLs had risen to Sh176 billion — Sh36.6 billion more in just three months. This spike has seen the bankers pay less tax to KRA in April.

The taxman received Sh11.4 billion from banks in April, down from Sh12.3 billion in same month last year.

“The decline of eight per cent is attributable largely to bad loans provisioning,” said the KRA. The drop came despite tax collections having grown 14.7 per cent to Sh132.1 billion in April-- the highest monthly collection in KRA’s history.

The CBK has lately forced banks to become more prudent in providing for loans that will not possibly be recovered in order to protect depositors’ cash.

The sector is now set for more tightening with KRA’s announcement.

“The KRA decision is informed by both professional considerations and the need to protect public funds from inappropriate decisions made by bank management in contravention of prudent banking practices,” says KRA.