Non-performing loans (NPLs) have hit a new multi-decade high of 15.5 percent of the banking industry's total lending as private sector credit growth softens.
Central Bank of Kenya (CBK) data shows the industry’s ratio of gross NPLs hit a new high in 12 months to February 2024, rising from 14.8 percent in December last year to set the highest rate since mid-2006.
The high ratio of bad loans has been on the back of increased interest rates by both the apex bank and commercial banks, with the former having lifted the benchmark lending rate to counter inflation and a weakening shilling.
“Increases in NPLs were noted in the real estate, trade, personal and household, energy and water and building and construction sectors,” the CBK indicated on Wednesday as it retained the benchmark interest rate at 13 percent, pausing from two consecutive jumbo rate increases in February and December.
Commercial banks have in recent months reset interest rates on loan facilities to clients higher, mirroring the tighter monetary stance by the CBK.
For instance, Equity Bank Kenya lifted its base lending rate to 18.24 percent following the CBK’s last interest rate bump in February while Access Bank recently pushed its base lending rate to 20 percent.
The higher interest rates on commercial bank borrowings have increased debt service costs for clients, adding to the distress facing debtors such as the difficult macroeconomic environment.
Subsequently, private sector credit growth has eased to its slowest rate of growth since July last year at 10.3 percent, in contrast to a higher growth rate of 13.8 percent in January 2024.
The CBK has nevertheless described the growth in private sector credit as resilient, supported largely by working capital needs by businesses.
“The number of loan applications and approvals remained resilient, reflecting sustained demand, particularly for working capital requirements,” the CBK said.
Despite the interest rate pressure emanating from the elevated benchmark interest rate, the CBK’s monetary policy committee (MPC) observed that its previous measures have lowered inflation and addressed the exchange rate pressures observed in February.
The deteriorating asset quality in the banking sector has been mirrored recently by elevated gross non-performing loans by lenders who reported their full-year earnings last year.
Banks have responded to the higher loan impairment levels by raising their provisioning for expected credit losses.
KCB Group, for instance, raised its provisions for the dud loans by 2.5 times to Sh33.64 billion in the year ended December 2023 as its NPL stock grew to Sh208.3 billion from Sh161.2 billion a year earlier.
Absa Bank Kenya has opted for loan restructures to customers to address the impairment pressure, having revised terms on facilities worth Sh2.1 billion in 2023 while NCBA Group wrote off facilities worth Sh12 billion in the same period.
The CBK notes that banks have continued to make adequate provisions for the NPLs.
