Capital Markets

Manufacturing, tourism register increase in pile of bad loans

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Central Bank of Kenya. FILE PHOTO | NMG

The banking sector’s pile of bad loans increased slightly in the two months ended February, with the defaults blamed on specific major borrowers from a few industries.

This marks a reversal of the trend in the decline of non-performing loans that were seen last year and which prompted most banks to reduce their provision for the bad debt, a move that lifted their earnings.

“The ratio of gross non-performing loans (NPLs) to gross loans stood at 14 percent in February 2022, compared to 13.1 percent in December 2021,” the Central Bank of Kenya said in its Monetary Policy Committee press statement.

“NPLs increases were noted in the manufacturing, tourism, restaurant and hotels, building and construction, and real estate sectors. These increases were attributable to specific challenges in the respective businesses, and banks have continued to make provisions for the NPLs.

Big customers can drive up the overall stock of bad loans since they typically take out major credit facilities, sometimes running into several billions of shillings per borrower.

The regulator did mention the lenders that have seen a spike in defaults but big banks are the ones that dominate big-ticket lending due to their large balance sheets.

Some of the sectors generating the new defaults could be suffering from the lingering impact of the Covid-19 pandemic. Tourism, restaurant, and hotels, for instance, bore the brunt of the local and global restrictions that were put in place to fight the spread of the respiratory illness.

They include bans or limits on local and international travel besides reduction in capacity and operating hours of the establishments.

The manufacturing sector is 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 pandemic, with owners of land and developed properties taking longer to sell their assets or faced with lower asking prices.

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