CBK set to penalise banks that understate bad loans for profits

What you need to know:

Central bank will penalise lenders which have understated their bad loans to book higher profits.
Non-performing debts rose to 8.2 per cent of total loans, up from 4.6 per cent last June.
Banks have previously been accused of under-reporting bad loans, allowing them to set aside lower provisions and thus push up their profitability.

The Central Bank of Kenya (CBK) will penalise lenders which have understated their bad loans to book higher profits, its head has said.

This comes even as non-performing bank loans in the sector rose to 8.2 per cent of total loans, up from 4.6 per cent last June, with the CBK attributing the spike to compliance with set guidelines.

“The ratio of gross non-performing loans to gross loans was 8.2 per cent in April, partly reflecting better reporting standards,” said CBK governor Patrick Njoroge on Tuesday.

Banks have previously been accused of under-reporting bad loans, allowing them to set aside lower provisions and thus push up their profitability.

A change of CBK’s top leadership mid-last year has seen increased focus on adherence to regulations to ensure financial stability.

Several banks reported sharp spikes of bad loans indicating poor classification. The regulator said he was working to ensure stability in the sector before enforcing the penalties which will negatively impact lenders’ financial positions.

“They are not off the hook, there are many penalties because a bank has to report correctly,” said Dr Njoroge.

Chase Bank, now under receivership, and National Bank 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: Bank sector loan defaults hit a ten-year high of Sh176 billion

The governor said recent instructions to external bank auditors to look into loan classifications found that some lenders were slow to move bad loans through the default cycle. Kenya Bankers Association declined to respond to the CBK comments.

Banks are required to set aside cash equal to the size of a loan not serviced for a period exceeding six months and 20 per cent of it if not serviced for more than three months.

Banking sector guidelines put the burden of accurate reporting of non-performing loans on board of directors as the highest policy setting organ of a lender.

Besides financial penalties set out in the Banking Act, the regulator has an option of imposing administrative sanctions including cancellation of bonuses, salary increments and directors’ compensation.

Sources within the CBK confirmed the regulator had become more stringent in enforcing penalties to ensure discipline in the sector which has been hit by collapse of three lenders in the last nine months.