Commercial banks are posting a rise in loan defaults from corporate clients as lengthy court processes slow down the sale of collateral to cut the stock of bad debts.
Top banks, including KCB Group, Equity Group, and NCBA Group, say some cases are taking up to five years to conclude, complicating their push to auction assets to recover their money.
The banking sector has not disclosed the amount of non-performing loans (NPLs) stuck with corporates.
However, Central Bank of Kenya (CBK) data showed of the Sh641.3 billion NPLs as of the end of March 2024, only Sh93.3 billion or 14.5 percent related to personal or households, suggesting that companies accounted for a bigger share of defaults.
Top defaults were in trade (Sh142.5 billion), manufacturing (Sh124.7 billion), and real estate (Sh117.1 billion), with the three making up 60 percent of the defaults in the banking sector as of the end of March 2024.
KCB’s default rate from corporates closed June 2024 at 32.7 percent from 32.4 percent in a similar period last year, retaining its spot as the segment with the highest portion of bad loans compared with the group’s average of 18.5 percent.
“One of the biggest challenges with corporates and recovering those NPLs is the long and painful court process. It is not about the value of security, or the viability of the businesses involved. You win in Malindi, somebody appeals in Kisii. You win in Kisii, and something is filed in Kitui. Yet the facility was borrowed in Taita,” said Paul Russo, KCB's chief executive.
Equity’s bad debt stock related to corporates hit 20.4 percent in June this year, also being the highest among other segments and above the group’s average of 12.9 percent.
NCBA, which mostly lends to corporates, did not disclose the NPL ratio for corporates but said 30 loan accounts from companies took up 70 percent or Sh28 billion out of its Sh40.9 billion gross defaults by the end of June 2024.
“It takes a very long time when you go through a legal process for resolution. The average we have seen is five years when the matter goes to court. The approach is to look at alternative dispute resolution that allows them to continue with their business as we continue with ours,” said David Abwoga, NCBA director of finance.
Lawrence Kimathi, chief finance officer at KCB said banks have had to be tactful with the timing of any sale of assets given the judicial process allows for appeal of judgment.
“You got to time it so well that when you get a ruling to your favour, you execute as soon as possible. If you dilly-dally, the company will be in Machakos getting another court order,” he said.
However, with auctioneers not getting buyers quickly, it has been challenging for the banks to get their timing right before being hit with an injunction.
In the July 2024 market perception survey, banks suggested that moving the loan recovery cases from the land court to the commercial court could improve the speed of resolution. Mr Russo backed this proposal.
“The transactions behind the recovery cases are commercial. Commercial courts would have a broader appreciation of the commercial implications of cases to the banks,” said Mr Russo.
NCBA chief executive John Gachora said while the land court comes in because most of the time the security is land, consolidating the cases in commercial courts can resolve the matters much faster.
“Doing it at one place will bring efficiency and once you have efficiency, it can run a bit quicker,” said Mr Gachora.
