The size of delinquent loans in September fell by the largest monthly margin in 15 years due to increased real estate auctions, repayment of non-performing debt and bad credit write-offs.
Data from the Central Bank of Kenya (CBK) shows that non-performing loans fell by 13.2 billion shillings between August and September to reach 491.8 billion shillings, falling below the 500 billion mark that had been crossed. for the first time in June due to payment defaults by large companies.
It was the biggest monthly drop in delinquent loans since June 2007, when it fell by 28.3 billion shillings after bad debt restructuring affected state-owned lenders.
Banks have recently turned to private treaties where distressed borrowers agree with lenders to seek the best available price for their properties and sell to repay the loans instead of relying on the auctioneer’s hammer.
The move gave banks the ability to circumvent the 2012 Land Act, which prevents them from auctioning seized assets at less than 75% of prevailing market value in Kenya’s soft economy that has slashed land prices. assets.
Banking industry analysts say lenders have also reported an increase in write-offs of bad debts they deem uncollectible, removing them from the NPL list and improving the overall health of the loan portfolio.
“From a general point of view, they suffered significant radiation, which is one of the factors.
They also repaired their loan portfolios by restructuring non-performing loans which allowed them to recover money they previously had little hope of recovering,” said Wesley Manambo, analyst at Gengis Capital.
Bad debts fell by 22.6 billion shillings between June and September.
An increase in business activity, coupled with a slight moderation in fuel prices, helped to improve the financial health of borrowers, thereby improving loan repayment rates.
Kenya’s successful presidential election accelerated the pace of economic activity that had been frozen and also unlocked new deals.
President William Ruto took the reins after a peaceful election, unlike some past voting cycles that have been marred by violence and protracted legal challenges, forcing investors to delay any decision on spending until things settle down. settle.
This helped repair the loan portfolio which had peaked at 514.4 billion shillings in June, partly due to uncertainty ahead of the August election, which weighed on business activities and forced a pause. in investments.
Bankers had 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 at the as a result of runaway inflation and government payment delays.
Rising commodity costs forced workers to cut back on non-essential items such as beer and airtime, which ultimately hurt companies like East Africa Breweries Limited (EABL) and Safaricom.
For manufacturers, the cost of inputs has also been an issue this year, due to the high price of imported raw materials due to global supply constraints, coupled with a weaker shilling against the dollar, which has increased costs. exchange rate for importers.
For its part, the CBK said the rise in NPLs was due to a few large borrowers who were struggling to repay their loans.
Going forward, banks face the possibility of a further increase in non-performing loans due to rising interest rates, analysts at ratings agency Moody’s said in a review of the big three. Kenya Lenders published last week.
Rates rose due to the CBK’s monetary policy tightening, through a hike in the base interest rate that guides loan pricing, in response to high inflation.
“The combination of high interest rates and rising inflation is giving Kenyan banks a mixed blessing. On the one hand, higher loan volumes and lending rates will increase profitability, while on the other, credit risk will increase, driving up problem loans and loan loss provisions,” Moody’s said. .
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The rating agency added that over the next 12-18 months, rising inflation, rising interest rates and cuts in government spending amid fiscal constraints will weigh on repayment capacity. borrowers.
Industries and other businesses are recovering from the effects of the economic difficulties of Covid-19, which have triggered job cuts and unpaid furloughs for retained staff as profitable businesses post losses.
It saw workers who had dipped into mortgages and unsecured loans for the purchase of goods such as furniture and cars and expenses such as default school fees. Unsecured loans are granted based on one’s salary.
Companies that have taken out loans based on their projected cash flows are also struggling to meet their loan obligations.
CBK data shows delinquent loans rose from 351 billion shillings in March 2020 when Kenya reported its first case of Covid-19.