Kenyan banks have increased interest rates on customer loans in the latest pricing cycle that will see customers deemed riskiest pay more than 20 percent, triggered by the rise in the central bank’s benchmark lending rate.
Lenders have in the past week been informing their customers about the impeding adjustments from next month that will affect both new and existing credit facilities. The new rates are being implemented across July and August.
Depending on the risk profile of customers, banks are charging a spread of about 6 percent on top of the base lending rate, which means that some customers will pay more than 18 percent after the review.
Stanbic Bank Kenya, for example, will start charging 18.57 percent on its mobile loans from August 21 having lifted its base lending rate to 13.15 percent from 12.58 percent.
For its part, Equity Group lifted its base lending rate from 12.5 percent to 14.69 percent on July 10, sending interest rates levied on customers with a higher risk profile to as high as 20.19 percent based on spreads from its risk-based pricing model.
Customers at Standard Chartered meanwhile face interest rates of as high as 16.5 percent after the lender changed its base lending rate to 10.5 percent from 10 percent previously, effective from August 5.
Absa Bank Kenya is set to adjust its base lending rate by one percent from this week while the lowest interest rate charged on loans at NCBA moves up to 13 percent from 12 percent.
“In view of the recent increase in the Central Bank of Kenya (CBK) rate, we wish to advise that we will adjust our Kenya shilling base lending rate to 13 percent per annum effective August 7,” NCBA told its customers in early July.
The loan repricing cycle was set off on June 26 when the CBK tightened its monetary policy with the view of firming down inflation expectations.
According to analysts, interest rates on bank loans are set to climb further as most banks implement their risk-based pricing models.
Earlier in May, the CBK disclosed it had approved the new pricing regime for 33 of Kenya’s 38 banks.
Interest rates on bank loans are expected to move further away from the Central Bank Rate at the full implementation of risk-based pricing.
The benchmark rate has influenced the pricing of bank loans, drawing from the legacy of the interest rate control regime when lenders were allowed to add a maximum margin of four percent on the CBR.
“In my view, when the CBK began giving approvals on risk-based pricing, this set the tone for higher interest rates in the repricing of risk. Banks can now unilaterally adjust interest rates even on existing loans,” noted Ronny Chokaa, a research analyst at Genghis Capital.
A variance in interest rates is expected in the private sector where different borrowers carry different risks in the eyes of the lender.
“We are seeing a variance in lending rates to the private sector where, for instance, public servants are deemed to have lower risk and may enjoy rates closer to the benchmark,” added Mr Chokaa.
Pressure on the risk-free rate (the return from Treasury bills and bonds) as investors demand higher risk-adjusted returns in the face of inflation has also triggered the general reset in the return from other asset classes, including bank loans and advances to customers.
The return from the 354-day Treasury bill from which banks routinely base their customer loan pricing is creeping towards the 13 percent mark having settled at 12.708 percent last week.
By adjusting their interest rates for risk, commercial banks are expected to assure their margins for profit but must walk a tightrope between profitability and triggering a catastrophe from loan defaults.
An escalation of non-performing loans to 14.9 percent at the end of May, which equals the pandemic high, is already a cause for concern.
Banks have already reacted to the asset quality deterioration by increasing their loan-loss provision buffers in the opening three months of the year.
“Increases in NPLs were noted in the manufacturing, trade, real estate and transport and communication sectors,” the CBK noted.
A further acceleration in NPLs would discourage loan issuances by banks to the private sector.
Untenable interest rates on customer loans would further drive up loan defaults and provisioning levels by banks, reducing the lenders’ profitability.
Private sector credit growth has remained resilient so far and settled at 13.2 percent in April and May.
The demand for credit from banks has been mainly sustained by working capital requirements, with strong credit growth being observed in manufacturing, transport and communication, trade and consumer durables sectors as mirrored by the number of loan applications and approvals.