Farmers replace property developers as biggest loan defaulters in Covid-19 era

Farmers overtook property developers and traders in loan defaults in the first year of Covid-19 shutdowns and restrictions, highlighting the struggle players in the key agricultural sector endured in sustaining the market for fresh produce.

About 23.67 percent of outstanding Sh109 billion loans advanced to the sector were not being serviced as of the end of March compared to 16.03 percent a year earlier, making it the sector with the highest non-performing loans (NPL) ratio.

Agriculture’s NPL ratio — the amount defaulted over outstanding loan portfolio to the sector — marginally zoomed past building and construction (23.52 percent) and trade (19.14 percent) sectors, latest Central Bank of Kenya industry statistics shows.

Borrowers in the sector endured a torrid year at a time farming was the notable bright spot at the height of pandemic knocks on economic activity in the second quarter (April-June) of 2020, growing 7.3 percent on the back of favourable weather.

This was when economic activity slumped into a trough with the gross domestic product (GDP) — a measure of economic output — shrinking 5.7 percent, and more than 1.7 million workers losing jobs, according to the Kenya National Bureau of Statistics (KNBS) data.

Analysts attribute the elevated defaults on loan repayments in agriculture to depressed demand from sectors such as hospitality, which was hardest hit by the restrictions and shutdowns imposed to stem the spread of the pandemic.

Samuel Tiriongo, head of research at the Kenya Bankers Association, says reduced demand for farm produce likely forced some farmers to look for alternative markets, which offered relatively lower prices while others struggled to find buyers.

“We appreciate that as much as agriculture was doing much better, the food that is produced has to be demanded by hotels. The produce has to be absorbed in other sectors for complete value chain,” Dr Tiriongo said.

“In the event that one sector that absorbs the produce from another sector is hit, you can see there is a backlash in terms of challenges with servicing of loans.”

Kenya’s public health authorities initially shut down hotels and restaurants during the first wave of the pandemic before allowing them to re-open under social distancing rules, including intermittent directives to restrict service to take-way orders amid scaled-down hours of operation.

The authorities further banned the service of food in social gatherings such as weddings and burials, partly also pounding the demand for farm produce such as meat, fruits and vegetables. That deepened the cash flow challenges for farmers and jolted their loan repayment plans, the data suggests.

NPLs in the agricultural sector, which account for more than a third of Kenya’s economic output, increased to Sh25.8 billion in March 2021 from Sh15.1 billion a year ago — a growth of 70.86 percent, which is only dwarfed by tourism and hotels, transport and communications as well as energy sectors.

The struggle in the sector was further reflected by the financial performance of listed plantation firms such as Williamson Tea, Kapchorua Tea and Limuru Tea, which either posted a drop-in in profit or sunk into losses, largely blaming weaker demand amid an oversupply of the beverage. “Even for the farmers who do not sell food to hotel industry either had to sell the same food at lower prices in alternative markets or actually not sell at all,” Dr Tiriongo said.

“So you can see in one way or another these sectors are interlinked and would be affected in case of a shock in one or some of the sectors.”

The banking industry data shows about 15.67 percent of the Sh104 billion outstanding loans to tourism, restaurants and hotels were non-performing at the end of March, a jump of more than three-quarters compared with a year earlier.

The hospitality sector has been the hardest hit by the pandemic shocks, particularly intermittent travel bans, resulting in more than doubling of actual non-performing loans.

By the end of March, investors in tourism, restaurants and hotels had not repaid Sh16.3 billion which were due to commercial lenders, a 108.97 percent surge compared with Sh7.8 billion a year earlier.

“Tourism and food industry definitely has been hit hard, especially during the first wave was affected because restaurants were completely shut,” Standard Chartered Bank Kenya chief executive Kariuki Ngari said.

“Tourism has been a subject of travel advisory…and, therefore, it is always very sensitive to these disruptions because it is linked to global travel and security.”

The CBK data, nonetheless, shows the hospitality sector’s NPL ratio at 15.67 percent was lower than agriculture’s (23.67 percent), building and construction (23.52 percent), trade (19.14 percent), transport and communications (17.67 percent), manufacturing (15.98 percent) and real estate (15.88 percent).

The growth in loan defaults in building and construction as well as real estate sectors has been linked to the slow uptake of housing units.

Most businesses scaled down operations, set up remote working stations and shed workers on the back of partial trade shutdowns and restrictions such as nighttime curfew, hurting demand for more office space and residential houses for fired employees.

This deepened cash flow challenges for property developers who have for years been battling flagging sales and rental prices in an economy, which was already softening even before the pandemic struck.

The CBK data shows 23.52 percent of the Sh125 billion loan portfolio to the building and construction sector was non-performing end-March compared with 20.48 percent of Sh117.2 billion outstanding loans the year before.

“The slow uptake of space and units has affected the rate at which borrowers in that sector can pay loans,” said Dr Tiriongo.

“But there could be a small component of that, which went to construction related to tenders by government.”

Covid-induced job losses, on the other hand, affected servicing of mortgages (real estate loans) taken on monthly payslips.

“For the mortgage book, servicing ability was largely impaired by job losses. For those who had taken mortgages on the account of their salary and the pay was no longer forthcoming, the loan got impaired,” NCBA Group chief economist Raphael Agung’ said in an earlier interview on April 13.

Restrictions in movement and social-distancing rules to curb the spread of the life-threatening Covid-19 pandemic also hit the public transportation hard, cutting earnings for public service vehicles owners and taxi operators, and jolting their loan repayment plans. About 17.67 percent of Sh223 billion outstanding loans to the transport and communications sector were in default in the review period compared with the 11.56 percent NPL ratio a year ago.