Banks hit big companies with higher interest rates

Kenya Bankers Association (KBA) CEO Habil Olaka. PHOTO | SALATON NJAU | NMG

Commercial banks are now charging large companies higher interest rates on loans compared to start-ups and individual borrowers, new data from the Central Bank of Kenya (CBK) shows, pointing to higher risk perception of larger firms who have in the past two years accounted for the bulk of the spike in non-performing loans.

The CBK data on lending rates by category of borrower shows that corporate firms paid 13.95 percent on average on loans of between one and five years in September, up from 11.9 percent a year earlier.

For their part, smaller businesses, which a year ago were paying the highest average rate at 12.5 percent, are now being asked for 13.8 percent as the loan pricing seesaws in their favour.

Personal loans to individuals were attracting an average interest rate of 13.2 percent in September, up from 12.1 percent a year earlier.

Corporate borrowers have traditionally paid lower interest on loans compared to smaller businesses and individuals on account of lower risk of default.

But the economic crisis triggered by the Covid-19 pandemic and exacerbated by the war in Ukraine has complicated the fortunes of large companies, whose defaults have triggered tremors in the banking industry.

The CBK earlier this year flagged a few large companies—which it did not name— as the ones responsible for rising defaults that pushed the portfolio of bad loans in the banking sector to an all-time high of Sh514 billion in June, although this retreated to Sh505 billion in August.

These firms, particularly those in the manufacturing sector, have been going through tough times as a result of the Covid-19 pandemic that reduced demand for goods in the local economy.

This year they have also been buffeted by higher input prices as a result of supply chain disruptions arising out of the Russia-Ukraine war that started in February, and periodic Covid-19 prevention shutdowns in China, where Kenya sources most of its capital goods.

Higher fuel prices that have raised the cost of goods and therefore inflation locally have also negatively affected demand for manufactured goods.

The CBK data on interest rates do not, however, indicate the total cost of credit, known as the annual percentage rate (APR), which includes the cost of associated charges loaded onto a loan.

The APR for personal loans, going by data from the Total Cost of Credit (TCC) website run by the CBK and the Kenya Bankers Association (KBA), is as high as 23.8 percent for unsecured facilities of up to five years.

The website only allows for APR calculations for personal loans and mortgages, making a like-for-like comparison for the total cost of business loans difficult.

Banks have recently been allowed to start pricing in risk in their lending plans under formulas that have been approved by the CBK, pointing to higher loan rates for individuals and businesses deemed high default candidates.

The risk-based pricing plan was mooted in a bid to expand access to bank loans, particularly by SMEs, which have traditionally struggled to get funding from banks due to high-risk perception.

The rise in approvals from bank plans resulted in an increase in the annual growth of private sector credit to a six-and-a-half-year high of 14.2 percent in July, which however retreated to 12.5 per cent in August due to the General Election.

Private sector loan rates have also gone up in line with signals from the monetary regulator which has since May raised the central bank rate (CBR) by 1.25 percentage points to 8.25 percent, in the face of high inflation that touched a 65-month high of 9.6 percent in October.

Central banks across the globe, including the US Federal Reserve and the Bank of England, have been raising their base rates as they battle runaway inflation that has hit 40-year highs in the two western economies.

For local banks, the move by the CBK to raise its CBR signals a higher cost of funds, prompting them to raise their rates on customer loans.

At the same time, the government is also paying higher rates in its domestic borrowing programme for the current fiscal year when the Treasury has been struggling to attract takers for its bond offerings.

The rate on the one-year Treasury bill has now climbed to 10 percent, the highest in three years, while the October Treasury bond sale also saw the CBK accepting bids priced above 14 percent after months of resisting touching this level in the monthly auctions.

Private sector borrowers competing against the government for bank funds end up paying a premium on the interest rates being offered by the government on its bonds and Treasury bills, given that the Treasury is a risk-free borrower.

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