Bank loan defaults are projected to rise further in the coming months on sustained high borrowing costs amid tough economic conditions characterised by layoffs and reduced disposable incomes, a top industry official said.
This is expected to limit growth in private sector credit as some commercial banks shun lending to households and businesses as a precautionary stance.
“We have seen high non-performing loan ratios before but only for a short time. The problem now is that it looks there will be long and sustained periods of high interest rates coupled with a difficult operating environment with taxes and job cuts,” NCBA Group Managing Director and Kenya Bankers Association (KBA) Chairman John Gachora said in an interview on Tuesday.
Latest available data by the Central Bank of Kenya (CBK) shows that non-performing bank loans stood at Sh638.4billion as of January 2024.
“If the rates stay high for long, many businesses will not afford to continue servicing their loans. We will also see fewer investments which will inevitably raise non-performing loans since investments are necessary in creating operational efficiencies” Mr Gachora added.
Last week, the CBK left its benchmark interest rate unchanged at 13 percent prolonging the stay of high borrowing costs in upcoming months.
The ratio of non-performing loans in April rose to an 18-year high rate of 16.1 percent from 15.5 percent in February with the defaults being spread out across the entire economic spectrum, including agriculture, real estate, tourism, hotels, trade, building and construction.
Private sector credit growth has fallen in tandem to 6.6 percent in March from 7.9 percent in March as commercial banks limit their supply of credit in the economy amidst the upheavals represented by higher costs and a softening economy.
While the CBK has the power to drive down commercial borrowing rates by cutting its benchmark rate, the apex bank has been hesitant to undertake ‘premature’ rate cuts at a time when inflation and interest rates have remained elevated in advanced economies.
Last week, CBK Governor Kamau Thugge described the high rates as the opportunity cost for keeping inflation and exchange rate pressures at bay. “I do agree that real interest rates are on the high side and of course that was the intention if we were going to deal with the inflationary and exchange rate pressures we were experiencing,” he said.
Banks further see higher non-performing loans from non-interest factors including pending bills and impending layoffs amid a changing operating environment defined by high taxes and reduced disposable incomes. The Finance Bill 2024, for instance, has clauses increasing tax obligations including VAT on financial services while consumers from July face fresh deductions under the Social Health Insurance Fund (SHIF).
The operations of commercial banks are however expected to remain resilient based on their already significant capital and liquidity ratios which has allowed them to increase provisions on expected credit losses.
Mr Gachora said that banks have continued engaging customers with the view of accommodating them through the high loan defaults stretch including facilitating restructures.
“The job of a banker is not just to lend money and take deposits, but also to act as a trusted financial advisor. Banks continue to engage their customers and we have tried to make a lot of accommodation for our customers knowing what is causing the high non-performing loans,” he added.
