The size of defaulted loans in September dropped by the largest monthly margin in 15 years on increased property auctions, repayment of non-performing debt and bad credit write-offs.
Central Bank of Kenya (CBK) data shows that non-performing loans shrank by Sh13.2 billion between August and September to Sh491.8 billion, retreating below the half-a-trillion mark that had been crossed for the first time in June due to large corporate defaults.
This is the biggest monthly drop in defaulted loans since June 2007 when it fell by Sh28.3 billion after the restructuring of bad loans affecting State-owned lenders.
Banks have recently turned to private treaties where distressed borrowers agree with the lenders to look for the best available price for their properties and sell to repay loans as opposed to relying on the auctioneer’s hammer.
The move has given banks room to get around the Land Act 2012, which bars them from auctioning seized assets at below 75 per cent of the prevailing market value in Kenya’s soft economy that has slashed asset prices.
Banking sector analysts say the lenders have also reported a rise in write-offs of bad loans they deem unrecoverable, taking them off the NPLs list and improving the general health of the loan book.
“From a broad perspective, they have had big write-offs which is one of the factors.
They have also been repairing their loan books through restructuring non-performing loans that have allowed them to claw back some money they previously had little hope of getting back,” said Wesley Manambo, an analyst Genghis Capital.
The bad loans dropped by Sh22.6 billion between June and September.
An increase in business activity, coupled with a slight moderation in fuel prices, has helped improve the financial health of borrowers, therefore improving loan repayment rates.
The successful completion of Kenya’s presidential election has accelerated the pace of economic activity that had been put on ice and also unlocked new deals.
President William Ruto took the reins after a peaceful election, in contrast to some past vote cycles that were marred by violence and protracted court challenges, causing investors to hold off making any decisions on spending until things settled.
This has helped repair the loan book that had risen to a high of Sh514.4 billion in June, in part due to uncertainty ahead of the August elections, which weighed on business activities and forced a pause in investments.
Bankers had identified the infrastructure, hospitality and manufacturing sectors as key drivers of non-performing loans in the first half of the year, partly due to reduced demand for goods and services in the wake of runaway inflation and delayed payments by the government.
The rise in the cost of essential commodities has forced workers to cut back spending on non-essential items such as beer and airtime, ultimately hurting firms like East Africa Breweries Limited (EABL) and Safaricom.
For manufacturers, the cost of inputs has also been a problem this year, due to the high price of imported raw materials on the back of global supply constraints, coupled with a weaker shilling to the dollar, which has raised forex costs for importers.
On its part, the CBK said that the rise in NPLs was driven by a few large borrowers who were struggling to service their loans.
Going forward, banks are facing a possibility of a new rise in non-performing loans due to higher interest rates, analysts at rating agency Moody’s said in a review of Kenya’s three largest lenders released last week.
Rates have gone up due to the tightening of monetary policy by the CBK—through a hike in the base lending rate that guides loan pricing— in response to high inflation.
“The combination of high-interest rates and rising inflation confer a mixed blessing on Kenyan banks. On the one hand, higher loan volumes and lending rates will boost profitability, while on the other, credit risk will rise, pushing up problem loans and loan-loss provisions,” Moody’s said.
The rating agency added that over the next 12 to 18 months, higher inflation, rising interest rates and reduced government spending amid fiscal constraints, will weigh on borrowers’ loan repayment capacity.
Industries and other businesses are recovering from the effects of Covid-19 economic hardships, which triggered job cuts and unpaid leave for retained staff as profitable firms move into losses.
This saw workers who had tapped mortgages and unsecured loans for the purchase of goods such as furniture and cars and expenses like school fees default. Unsecured loans are given on the strength of one’s salary.
Businesses that tapped loans based on their projected cash flows are also struggling to meet their loan obligations.
The CBK data shows that defaulted loans grew from Sh351 billion in March 2020 when Kenya reported its first Covid-19 case.