Defaults in the banking industry rose to Sh441.8 billion in the eight months to August, reversing a decline in the non-performing debt that had been seen in recent months.
The NPLs rose to peak at Sh444.2 billion in February on the economic fallout from the Covid-19 pandemic and had recently shrunk to lows of Sh433.3 billion before the August spike, according to Central Bank of Kenya (CBK) data.
The regulator did not give the reason for the Sh10.9 billion increase in defaults in the August Monthly Economic Indicators report.
Some of the sectors that were hit hardest by the pandemic have, however, continued to recover from the easing of the restrictions put in place to fight the spread of the disease.
“Repayments and recoveries were noted in the tourism, restaurants and hotels and building and construction sectors,” the CBK said in its Monetary Policy Committee press release.
The banking sector’s profitability grew in the eight-month period despite the increase in defaults, as lenders made smaller provisions for the NPLs compared to last year when the pandemic crisis was unfolding.
Pre-tax profits increased 57.2 percent to Sh127.8 billion in the review period from Sh81.3 billion a year earlier as banks reduced their provisions on a brighter economic outlook amidst easing of restrictions and ongoing vaccinations.
Provisions have the effect of hitting the bottom-line while eroding the capital base, meaning that a reduction in the amount set aside to absorb losses boosts earnings.
Part of the provisions represent estimates of potential losses from defaults expected in the near future because of general economic weakness or problems specific to certain industries and customers.
Beginning January 1, 2018, banks have been required to make provisions for expected loan losses rather than those already incurred following the adoption of the more conservative International Financial Reporting Standards (IFRS 9).