Banks cautious on loans repricing in New Year as high rates fuel defaults
From left: Co-op Bank CEO Gideon Muriuki, Treasury CS Njuguna Ndung’u and CBK Governor Kamau Thugge on the side-lines of an event in September. PHOTO | POOL
Commercial banks face tough decisions this New Year to balance between passing the increased cost of funds to customers or keeping lending rates relatively unchanged to avoid triggering more defaults.
In 2023 the market witnessed three increases in interest rates induced by the Central Bank of Kenya (CBK), with the last one coming on December 5, giving borrowers and lenders something new to think about given the rate of loan defaults that had by October hit levels last seen 16 years ago.
Now banks, many having raised their provisioning for loan defaults, face a tough decision in assessing how much of the increase in the central bank rate (CBR) they can pass to customers without tempting customers to give up on servicing loans.
Banks will also be closely following the pricing of government paper, which could tempt them to cut lending to the private sector and capitalise on the State's appetite for debt to park money in treasury bills and treasury bonds.
The tough balancing act may see some banks delay the full repricing of loans in line with the CBR that moved from 10.5 percent to 12.5 percent— the highest since September 5, 2012, when the rate was at 13 percent.
Kenya Bankers Association (KBA) chief executive Habil Olaka says while the rise was not a surprise, the magnitude (200 basis points) was and it “definitely creates some challenges.”
Mr Olaka expects deposits to become more expensive as banks raise rates to convince customers not to direct their deposits to the government’s attractive rates. A higher cost of funds means banks will have to pass this to customers, leading to higher interest rates.
“What happens when (lending) rates go up, the probability of customers being unable to service loans increases and you start seeing non-performing loans begin to edge upwards. It is an environment in which banks will then pull back in terms of lending,” said Dr Olaka in an interview after the CBR rise.
Equity Bank has raised its reference rate from 14.69 percent to 17.56 percent while that of NCBA has moved from 14.5 percent to 16.5 percent, offering a glimpse into the headache that borrowers will run into as the New Year starts.
KCB has adjusted its base rate from 13.8 percent to 14.7 percent, being 0.9 percentage points and an indication that it has opted to absorb part of the cost of credit.
Stanbic Bank Kenya and South Sudan chief executive Joshua Oigara says the lender made a decision to support customers by not passing the full increase in cost of funds to customers and intend to maintain this strategy in the New Year.
“NPLs in the industry are at the highest level ever and the way to get out of it is to stay closer to our clients and support them through the crisis. We are projecting that our NPLs will come down in 2024, helped by supporting our clients through the cycles,” says Mr Oigara.
“Why have we increased the level of provisioning? We see the headwinds. Our clients’ income levels are coming under a lot of pressure from different areas. My view is that this environment we are in is not short because it is not just a Kenya-centric problem."
KCB Group chief executive Paul Russo says the lender will be on standby to support businesses recover and the economy to rebound, fueled by rising consumer and business confidence and easing inflationary pressure.
“We see currencies and interest rates beginning to stabilise in the wake of a slowdown in rate raises in the US and Europe, effectively spurring growth,” said Mr Russo.
Rakesh Kashyap, the CEO of Little Pesa, a non-deposit-taking micro-finance firm that provides short-term unsecured loans to salaried people expects digital lenders to mirror banks in not hitting customers with steep rises in interest rates.
“We are going for a minimal increase in rates of interest and are trying to protect our margins by increasing volumes as the demand for short-term loans is still very high. We are cushioning our borrowers who are experiencing payment issues by offering Flexipay loans where they can repay in installments,” says Mr Kashyap.
Many banks had by September seen a faster jump in interest expense compared with interest income, slowing the pace of growth in net interest income as they absorbed part of the cost of funds.
Equity CEO James Mwangi says that, while the bank raised interest rates in 2023, it has been careful not to pass the entire rise in the cost of funds to customers because ‘we did not want to deal with mass defaults.’ It is a stance he believes will work into the New Year.
“We have chosen to use the profit and loss (P&L) statement to support the customer by ensuring that we don’t pass the full impact of high-interest rates, inflation, and depreciation of the Kenya currency to the customers,” said Mr Mwangi.
CBK data shows gross non-performing loans had hit Sh615.54 billion at the end of September, marking three straight months of increasing defaults.
The NPL ratio deteriorated to 15.3 percent in October, pointing to the continued loan defaults that have forced lenders to set aside more money in anticipation of increased defaults.
