By JAMES MULIRO
Bad debts in the commercial banking sector stood at an all-time high of Sh117 billion at the end of March 2015, depicting just how dire the situation of bad loans could get. That is nearly a 10% growth from Sh107 billion stock of bad loans at the end of last year.
The growing stock of the loans that have gone bad can largely be attributed to high lending rates and the enduring tough business environment. Out of the 11 sectors assessed by the Central Bank, 10 of them witnessed a growth in non-performing loans (NPLs), with the building, construction and real estate sectors experiencing the strongest surge.
“Most of the loans that are going bad are actually from the government financing side. These are the construction loans, most of which rely on government payments to contractors for them to meet their debt repayment obligations,” said Benard Omenda, the head of treasury at Equatorial Commercial Bank (ECB).
Industry players have attributed the growth in NPLs to increased credit uptake in the market in almost all sectors save for the tourism and hospitality industry. But, rapid growth of NPLs in the building, construction and the real estate sectors can largely be blamed on government delays in paying contractors or suppliers. This is notwithstanding these sectors contribution to economic growth last year.
Bad loans in the building and construction sector increased the fastest by 27.6% to Sh12.5 billion at the end of March up from Sh9.8 billion at the end of December 2014. In the real estate sector, NPLs rose by 20.5% to Sh14.7 billion at the end of the first quarter up from Sh12.2 billion at the start of the year.
“There appears to be a shift in the drivers on NPL growth from the consumer side to government contractors and suppliers,” says Old Mutual Kenya analysis.
According to the CBK, a prevailing high lending rates regime coupled with a tough business environment due to prevalent security threats in the country, dwindling inflows from the tea and tourism sector have seen the NPLs rise to a new high.
Analysts further note that potential risks seem to be emanating from retail segment exposure though the expected decline in interest rates, albeit slowly augurs well on NPLs.
Currently, interest rates are at an average of 15.46%, which according to the Kenya Bankers Association (KBA), augurs well for the growth of credit in the market. KBA indicates that the lending rates are expected to fall further going forward, having already declined from 17% in January this year to the current level.
“The average lending rates have declined from 17% in January 2014 to 15.5% by end of the first quarter of 2015. This trend is likely to be sustained so long as the market dynamics of macroeconomic stability, competition and continuous measures being put in place to improve the general operating environment for the borrowing businesses and households. The growth in NPLs is therefore attributable to the general growth in the credit portfolio and to an extent challenges attributable to specific sectors, in particular tourism and construction,” KBA chief executive officer, Habil Olaka said in an interview.
The growth of NPLs has also followed in the path of credit uptake in the period under review. Despite the fact that the bad loans continue to balloon, there was increased demand for loans in the banking sector with banks issuing out loans valued at Sh2 trillion at the end of March this year up from Sh1.97 trillion worth of loans that had been issued out as at the end of December last year. Increased appetite for loans was witnessed in all sectors of the economy as assessed by the Central Bank except in the building and construction, mining and quarrying, agriculture, tourism and hospitality sectors.
The hotel and hospitality industry, in fact witnessed a decline in credit uptake due to the poor performance of the tourism industry. The tourism and hospitality industry has suffered the effects of prevailing spate of insecurity in the country occasioned by the Al-Shabaab terrorist group. This has led to issuance of travel advisories by Kenya’s key tourism source markets such as the US, Western European countries, Australia and France to their nationals against visiting parts of Kenya that face the highest risk of terrorist attacks. The Kenya’s coastal region is particularly the most affected, with more than 23 high end tourist hotels shutting down and at least 30,000 hotel workers laid off their jobs. This has seen credit uptake in the sector remain low despite high levels of NPLs.
KBA however, indicates that the situation should not be alarming as to lead to banks’ declining to issue loans more aggressively despite the apparent surge in loan appetite. The lobby group in fact says that banks’ responsiveness to the demand for credit will ideally be accompanied by increase in bad loans, which can only be traced to notably the tourism, construction and real estate sectors.
“It is worth to note that the quality of bank assets, as measured by NPLs to gross loans has remained stable even amidst the growth in assets driven by credit expansion,” Mr Olaka further said.
In the quarter ending June 30, 2015, banks plan to tighten their credit recovery efforts to improve the overall quality of their asset portfolio. The heightened credit recovery efforts in the tourism, building and construction, mining and quarrying and real estate sectors is on the back of expectations that loan defaults in these sectors is expected to rise further in the second quarter of 2015.
“Banks cite heightened political activity, the current spate of insecurity and pending Mining Bill in parliament as reasons for them to intensify credit recovery in the Tourism, Mining and Quarrying sectors. Delayed payments to contracts by the government may be attributed to intensified credit recovery efforts in the building and construction sector,” the CBK said in a Credit Survey report released earlier this year.
Analysts further expect banks to move to contain the rising NPLs and keep them at low levels.
“Nonetheless, asset quality will remain a key risk, partly reflecting unseasoned loan books and the evolving nature of risk-management processes,” Old Mutual analysts further said.
Equally, the CBK expects the banking sector to remain stable and resilient in the remainder of 2015. It said that the capital buffer requirement that took effect from January 2015 will enhance the resilience of the banking sector as banks explore new opportunities in Kenya and beyond.
