Banks stuck with Sh330bn of Covid-19 restructured loans


The Central Bank of Kenya in Nairobi. FILE PHOTO | NMG

Commercial banks are still holding Sh330.9 billion worth of restructured loans on their books nearly two years since Covid-19 relief measures, which allowed for renegotiation of payment terms expired.

The Central Bank of Kenya (CBK) monetary policy report for December 2022 shows that by the end of last year, the outstanding amount of restructured loans accounted for nine percent of the sector's loan book.

The regulator in March 2020 put in place emergency measures that included allowing lenders and borrowers to negotiate moratoriums on loan repayments to mitigate the adverse economic effects of coronavirus, with these measures expiring on March 31, 2021.

Under the plan, loans worth a cumulative Sh1.7 trillion were restructured, accounting for 57 percent of the banking sector’s gross loan book.

By the end of the period, the value of outstanding restructured loans amounted to Sh569.3 billion, or 19 percent of the total gross loans, reflecting progressive repayments under easier terms.

Read: Restructured bank loans hit 54pc in December

The latest CBK data, therefore, shows that since the expiry of the emergency measures, borrowers have paid up a further Sh238.4 billion worth of restructured credit to banks in an economy that continues to recover from the recession of the Covid shock.

“Most of the pending restructured loans are likely there because of the extension of the tenor [repayment period] of the facilities,” said an executive at one of the top banks.

“The restructuring of the Covid loans took several forms including a moratorium on principal payments. Many customers have resumed normal servicing of the loans as the economy recovers.”

The emergency measures provided relief to borrowers and supported the continued operation of businesses including essential sectors that saw a sharp reduction in inflows due to the pandemic, while also mitigating more severe loss of jobs and livelihoods.

About 1.72 million workers lost jobs in the first three months of the pandemic between March and June 2020, when Kenya imposed a lockdown to curb the spread of the deadly virus.

The initiative was, therefore, critical in that it gave individuals and companies a range of options to ease their repayment strain, including a three-month repayment holiday, lengthening the tenure of their loans, or opting to just pay the interest for a period of time. The relief also applied to credit card debt and mortgages.

For banks, it prevented a heavy deterioration of the quality of their loan book, keeping the ratio of non-performing loans below 15 percent during the worst of the Covid period when businesses were operating below capacity and many people lost jobs.

In November, Equity Bank disclosed that it had given its borrowers loan repayment moratoriums worth Sh171 billion during the Covid-19 pandemic, out of which 90 percent was either fully repaid or was being serviced by the end of the third quarter of last year.

The lender said restructured loans worth Sh49.4 billion had been fully repaid by the end of September 2022, while borrowers were servicing others worth Sh104.9 billion.

Loans worth Sh9.5 billion were non-performing from the portfolio of restructured facilities, with Sh7.7 billion worth of loans being in line for resumption of service by the end of December last year.

For purposes of provisions for actual and anticipated credit losses, the restructured loans are now treated the same as others after the expiry of CBK’s regulatory flexibility in March 2021. Provisions for losses have the effect of eating into capital and lowering reported earnings.

For one year, the CBK was not strict on the requirement for provisioning on loans that were being repaid on time as of March 2, 2020, but which were subsequently restructured in the wake of the pandemic.

While the economy has largely recovered its footing following the pandemic, the volume of bad loans on banks' books remains elevated, pointing to lingering repayment problems among some large borrowers in sectors that are still affected by the aftershocks of the pandemic and the war in Ukraine.

Also read: How Kenyan banks are pricing their loans

The manufacturing sector has in particular faced increased costs due to higher imported input prices on the back of supply chain hiccups as producing countries race to fill pent-up demand backlog.

The rise in global inflation partially as a result of the Russia-Ukraine conflict has also raised input prices and reduced consumer purchasing power, affecting the uptake of products.

[email protected]