The volume of defaulted loans fell by the largest monthly margin in 15 years in September as a result of increased property auctions, repayment of problem debts and write-offs of bad loans.
Data from the Central Bank of Kenya (CBK) showed that non-performing loans fell by Sh13.2 billion to Sh491.8 billion between August and September, falling back from the half-trillion mark it first crossed in June. to major corporate defaults.
It was the biggest monthly decline since June 2007, when bad loan restructuring hit state-owned lenders.
Banks have recently turned to private contracts where troubled borrowers agree to sell their properties to pay off loans instead of seeking the best price for their properties with lenders and relying on the auctioneer’s hammer.
The move allowed banks to comply with the 2012 Land Act, which prohibits auctioning off confiscated assets below 75 percent of current market value in Kenya’s soft economy, which has depressed asset prices.
Lenders have also reported an increase in bad loan write-offs, removing them from the NPL list and improving the overall health of the loan book, banking sector analysts say.
“From a broader perspective, they’ve had massive write-offs, which is one of the factors.
They are also repairing their loan books by restructuring non-performing loans, which allows them to recoup some of the money they previously had little hope of recovering,” said analyst Wesley Manambo of Genghis Capital.
Bad loans fell by Sh22.6 billion between June and September.
Increased business activity, a slight reduction in fuel prices helped to improve the financial condition of borrowers, so loan repayment rates improved.
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The successful conclusion of the presidential elections in Kenya accelerated the pace of economic activity and led to the opening of new deals.
President William Ruto took power after a peaceful election, unlike some past polls marred by violence and protracted court challenges, prompting investors to hold off on any spending decisions until things are resolved.
This helped repair its loan book, which swelled to Sh514.4 billion in June partly due to uncertainty ahead of the August elections, which weighed on business activity and forced investment to stall.
Bankers identified the infrastructure, hospitality and manufacturing sectors as the main drivers of non-performing loans in the first half of the year, partly due to lower demand for goods and services as a result of inflation and delayed government payments.
The rise in the price of essential goods has forced workers to cut back on non-essentials such as beer and airtime, ultimately hurting firms such as East Africa Breweries Limited (EABL) and Safaricom.
For manufacturers, the cost of inputs has also been an issue this year due to higher prices of imported raw materials amid global supply constraints and a weaker dollar, which has increased importers’ forex costs.
For its part, the CBK said the growth in NPLs was driven by a few large borrowers struggling to service their loans.
Analysts at Moody’s rating agency said in a review of Kenya’s three biggest lenders released last week that banks face the possibility of a new surge in bad loans going forward due to high interest rates.
Interest rates have risen in response to high inflation by the CBK’s tightening of monetary policy – raising the prime lending rate, which guides loan prices.
“The combination of high interest rates and rising inflation is a mixed blessing for Kenyan banks. On the one hand, higher loan volumes and loan interest rates will increase profitability, and on the other hand, credit risk will increase, increasing provisions for problem loans and loan losses,” Moody’s said.
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The rating agency added that over the next 12-18 months, higher inflation, rising interest rates and lower government spending amid fiscal constraints will affect borrowers’ ability to repay loans.
Industries and other businesses are recovering from the effects of the Covid-19 economic hardship, which has led to job cuts and unpaid leave for retained workers as profitable firms suffer losses.
This has seen workers turn to mortgages and unsecured loans to buy goods such as furniture and cars and for expenses such as school fees. Unsecured loans are given on the basis of salary.
Enterprises that take loans based on projected cash flows also have difficulty meeting their loan obligations.
CBK data shows that defaulted loans rose from Sh351 billion in March 2020 when Kenya reported its first case of Covid-19.