Lenders have reduced appetite for lending to high risk borrowers in wake of Covid-19.
Fresh CBK data shows that lending rates have fallen for three consecutive months to an average of 11.92 percent in April.
This is the lowest since CBK started disclosing the lending rate in July 1991 during the reign of the then governor Eric Kotut.
Banks have reduced the cost of credit to the lowest level in over 29 years following a consistent drop in the Central Bank of Kenya (CBK) benchmark lending rate and lenders’ reduced appetite to extend credit to high-risk borrowers in the wake of the Covid-19 pandemic.
The trend has eased fears of a rise in the cost of credit after the removal of the interest rate cap last November.
Fresh CBK data shows that lending rates have fallen for three consecutive months to an average of 11.92 percent in April. This is the lowest since CBK started disclosing the lending rate in July 1991 during the reign of the then governor Eric Kotut.
Kenya in November scrapped the cap on commercial lending rates, which had been blamed for stalling lending to small businesses and individuals. The removal of the legal cap led to fears of a likely return to the era of high cost of loans, which had at one point hit 25 percent.
Kenya Bankers Association (KBA) chief executive Habil Olaka told the Business Daily that the lower cost of loans was in line with a fall in the benchmark lending rate as well as risk averseness by lenders since Coronavirus set in from mid-March.
“The fall could possibly be because the very high-risk borrowers who would need to be priced higher are not actually accessing credit in the prevailing conditions,” said Mr Olaka. “Lenders have become risk conscious and so they are not going for very high risk borrowers, which will require banks to charge rates commensurate with the risk.”
He said lenders have been reviewing their appetite borrowers in line with risk-based pricing models, but Covid-19 has hurt the pace.
“They are starting with acceptable risk first then onboarding high risk ones gradually. But given the Covid-19 challenge, very high risk borrowers will not be attractive to banks until the economic situation improves,” said Mr Olaka.
Demand for new loans has also been hit and therefore the old loans that were pegged on the CBR (Central Bank Rate) cannot be increased.
Last month, the CBK retained the benchmark lending rate at seven percent, arguing that the economy was operating below potential. The move was meant to cushion the economy from the impact of Coronavirus. The regulator had in March also lowered the cash reserve ratio for commercial banks from 5.25 percent to 4.25 percent. The move released an extra Sh35.2 billion for banks to lend to customers.
In November, CBK had also reduced its benchmark rate by 50 basis points from nine percent, the first such move by the regulator after holding it steady for 14 months.
The Monetary Policy Committee usually meets every two months, but has been meeting once a month in the recent past due to the economic challenges posed by the global pandemic. The next such meeting is set for Thursday next week.
Despite the reduction in the price of credit, however, there has been an increase non-performing loans. Data from the CBK shows that the ratio of non-performing loans (NPLs) rose from 12.5 percent to 13.1 percent in April - the highest since August 2007 when it stood at 14.41 percent.
Defaulted loans - which is credit that remains unpaid for more than 90 days - jumped by Sh11.1 billion to stand at Sh366.8 billion in April.
A slowdown in business activities and the uncertain future caused by the Covid-19 pandemic globally has forced many companies and investors to put a freeze on expansion plans.
Mr Olaka said the increase in NPLs ratio was expected given the many firms running into headwinds. He expects the ratio to ease after the virus is contained and as economic conditions start improving.
“As more firms face survival difficulties, this is expected to filter into their performance on credit side,” he said.
Despite this, private sector credit grew by 7.7 percent in the 12 months to February, compared to 7.1 percent in December, the CBK said. This, however, fell below the ideal rate of between12-15 percent.
Analysts say high-net worth investors and companies have opted not to invest in expanding their businesses or starting new ventures, fearing lower sales and returns arising from restrictions on movement of people and goods that were imposed to curb the spread of the disease.
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