Markets & Finance
Bank sector loan defaults hit a ten-year high of Sh176 billionThursday April 28 2016
Loan defaults in the banking sector have touched a decade high as Central Bank of Kenya (CBK) continues exerting pressure on commercial lenders to adhere to set regulations on treatment of non-performing debt.
Bad loans currently stand at eight per cent of the total loans issued by banks said CBK, up from 6.1 per cent in December and 4.6 per cent in June.
The last time bad loans were more than eight per cent of total loans issued by banks was in October 2005.
“The ratio of gross non-performing loans to gross loans rose to eight per cent in March 2016 partly due to delayed payments and enhanced reclassification of accounts to non-performing status at end 2015 statutory audits,” said Central Bank governor Patrick Njoroge.
With a total loan book of Sh2.2 trillion, this means the bad loans are at Sh176 billion up from Sh139.4 billion in December—a Sh36.6 billion spike in the first three months of the year.
Banks have been under increased pressure to adhere to set regulations following change of regime at CBK which saw macroeconomist Dr Njoroge replace Njuguna Ndung’u in March last year.
READ: CBK targets rogue bank directors with fresh audit of insider loans
A spike in bad loans in the first quarter of the year will represent a second round of such shock underlining concern over corporate governance in the sector.
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 in the three months to Sh11.7 billion.
READ: Chase Bank shocks market with Sh8bn secret insider loans
Commercial banks had for long fought accusations by different analysts of inflating their profitability by understating their non-performing loans.
Understating of bad loans allows banks to set aside lower provisions for default, a deductible expense in their profit and loss accounts.
Under-provisioning for bad loans may help banks report better profits, but in the event that a large number of borrowers fail to meet their obligations, it exposes the lenders to financial difficulties and even possible collapse.
Some of the bad loans in the sector have been linked to insider lending. CBK has ordered fresh audit of insider loans across the sector, which may lead to further ballooning of the bad book.
Reckless lending has resulted in three banks —Dubai Bank, Imperial and Chase falling in the last one year.
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