The share of loan defaults has increased to a one-year high, pointing to a cash crunch in the economy that could set up thousands of borrowers for property seizures.
The latest Central Bank of Kenya (CBK) data shows that 14.1 percent of all loans were defaulted by end of April, the sharpest 12-month increase over a year.
The stock of bad loans had risen to Sh473 billion in March this year. The share of loan defaults had dropped to 13.1 percent in December but has since been rising.
Banks that had gone slow on property seizures last year following the pandemic could now be forced to step up debt recovery efforts to clean up their loan books, in what could lead to a spike in auctions.
The CBK says the defaulted loans are mainly in the building and construction, manufacturing, trade as well as transport and communication sectors signaling that firms and individuals who had taken new loans on the strength of increasing cash flow with the reopening of the economy are struggling to service their loans.
Businesses that tapped loans based on their projected cash flows are also struggling to meet the loan obligations, the data shows. “These increases were attributable to specific challenges in the respective businesses, and banks have continued to make provisions for the NPLs,” said the CBK.
The manufacturing and building sectors are currently grappling with escalating costs of raw materials and soft demand as rising prices of final products hit consumers’ spending power.
The real estate sector is also a victim of the loss of income among households and businesses as a result of the lingering economic effects of the pandemic, with owners of land and developed properties taking longer to sell their assets or faced with lower asking prices.
The economy which rebounded in 2021 to grow at 7.5 percent, the fastest pace in 11 years, has picked up from the 0.3 percent contraction in 2020.
The robust growth has extended into the first quarter of the year as banks return to the market offering more loans to businesses and homes.
The details on bad loans were revealed as the CBK on Monday raised its policy lending rate for the first time since April 2020 by a quarter percentage point to stem rising inflation and stabilise the Shilling.
The tightening of liquidity is, however, expected to have a negative effect on access to credit for individuals and companies.
A slowdown in lending could deny the economy new investments and threaten the projected domestic output target of over six per cent this year.
“The Committee noted the elevated risks to the inflation outlook due to increased global commodity prices and supply chain disruptions, and concluded that there was scope for a tightening of the monetary policy in order to further anchor inflation expectations,” said MPC.
“In view of these developments, the MPC decided to raise the Central Bank Rate (CBR) from 7.00 percent to 7.50 percent.”
The key rate had been retained by the CBK at 7.00 percent in more than two years since April 2020.
