Mortgage, car loan defaults cross Sh100bn

Default on mortgages and loans advanced to the transport sector has crossed the Sh100 billion mark in the wake of layoffs, business closures and travel restrictions triggered by the Covid-19 pandemic.

The transport and real estate sectors topped loan defaults over the nine months to December last year as the country reeled from an economic crisis due to the pandemic, fresh Central Bank of Kenya (CBK) data shows.

Loans secured through title deeds and motor vehicle logbooks posted the fastest default growth rates over the period, coinciding with crippling travel restrictions and scaled down business operations to curb the spread of Covid-19.

The CBK data shows that the cumulative value of loans defaulted by the transport and real estate sectors jumped 45.25 percent between March and December to Sh99.5 billion.

The two sectors also accounted for 46.27 percent of Sh67 billion in new bad loans between March and December last year—underlying the huge knocks they suffered due to the pandemic.

Defaults in construction jumped 4.6 percent to Sh28.6 billion, pushing defaults in the transport and property market to Sh128.1 billion in December from Sh92.5 billion.

Loan defaults in the transport and communication sector rose by 81.43 per cent over the nine-month period to Sh38.1 billion, mainly fuelled by the closure of learning institutions and matatu investors who had acquired vehicles under asset finance arrangements.

Real estate recorded a 29.2 percent jump in bad loans between March and December to Sh61.4 billion, largely due to job losses.

A majority of Kenya’s mortgage loans — which stood at 27,993 accounts valued at Sh237.7 billion in December 2019 — were secured on strength of salaries.

"It (the jump in bad loans among borrowers in transportation) is purely the result of a macroeconomic shock arising out of that reduced economic activity like reduced movement of persons which impaired their ability to service loans," NCBA Group’s chief economist, Raphael Agung’, said on Tuesday.

"For the mortgage book, servicing ability was largely impaired by job losses. For those who had taken mortgages on account of their salaries and the pay was no longer forthcoming, the loan got impaired."

The mounting defaults in the property market are a reflection of the struggles that mortgage holders are undergoing in an economy that has witnessed a string of job losses in recent months across nearly all sectors as corporates intensify austerity measures to protect profits.

This has seen workers who took mortgages on the strength of their pay slips default. The slowdown in real estate is hurting property developers who are finding it difficult to sell units that were built on loans.

Banks have stepped up debt recovery efforts to clean up their loan books, leading to a spike in property and car seizures.

Pandemic restrictions

Overall, the gross non-performing loans (NPLs) rose from Sh357 billion at the onset of the pandemic restrictions in March to Sh424.1 billion in December 2020 — an equivalent of 14.46 percent of the industry’s Sh2.93 trillion loan book.

This grew to Sh432.45 billion by end of February 2021, according to an updated CBK credit report that does not give sectoral distribution.

Kenya’s top nine listed banks raised their provision for non-performing loans by a record Sh77.3 billion in the year ended December, cutting their combined net earnings by 25.5 percent to Sh81.2 billion.

KCB, Equity, Co-op Bank, I&M , Absa Bank Kenya , NCBA, Standard Chartered Bank Kenya, DTB and Stanbic Holdings made provisions of Sh109.7 billion in the review period, up from Sh32.3 billion the year before.

CBK governor Patrick Njoroge has flagged loan defaults as the biggest risk to the country’s banking industry.

The Monetary Policy Committee (MPC) — the top decision making organ of the CBK— on March 29 projected that NPLs were likely to peak at 16 percent in June, slightly lower than 17 percent forecast during the previous meeting two months earlier.

Runaway problem

"It (NPL ratio) is still in the same mode of magnitude, but at least we are comforted that this is not sort of a runway problem and it’s well-contained," Dr Njoroge said on March 30.

The rise in problem credit usually triggers a jump in property auction as banks move to seize assets from defaulters in a bid to soften bad loans-induced impact on profitability.