Defaulted loans in the banking sector jumped Sh40 billion in the two months to February on the back of 16 accounts that masked the increased repayments in an economy recovering from Covi-19 economic hardships.
The share of loan defaults increased to 14 percent at the end of February from 13.1 percent in December, giving the impression of a sector that was facing a return of mounting defaults witnessed at the peak of pandemic hardships in 2020.
The Central Bank of Kenya (CBK) on Wednesday linked the jump in defaulted loans to the 16 undisclosed accounts. The Sh40 billion defaulted loan is the highest jump in a period of 60 days that Kenya has witnessed in decades, bankers say.
CBK data shows that the previous largest jump over a two-month period was between February and April 2020 at the onset of the Covid-19 pandemic, which triggered layoffs, pay cuts and business closures.
The banking regulator said that while credit risk remains a concern for banks, the spike in the bad loan ratio was caused by just a few large borrowers in capital-intensive sectors such as manufacturing, construction and real estate.
Manufacturers have been grappling with increased cost of inputs that has raised the prices of basic commodities, while the construction sector is grappling with record building material prices.
“It relates to about Sh40 billion in terms of the loans that led to that increase in that ratio and relates to something like 16 accounts. The point to make is that this is not systemic across the various sectors,” said CBK governor Patrick Njoroge during a post-Monetary Policy Committee briefing Wednesday.
“A few of those loans were in the manufacturing sector, which has continued to perform very well, but for specific institutions that had issues … those loans have now been classified as NPLs,” he said.
Big borrowers can easily drive up the stock of bad loans with just a few defaults, since they typically take out major credit lines, sometimes running into several billions of shillings per borrower.
Manufacturers, for instance, require large tranches to fund industrial good imports, whose purchases rose by 28 percent to Sh1.37 trillion in the 12 months to February 2022.
In the case of the 16 loans mentioned by the CBK, each borrower would have carried an average exposure of Sh2.5 billion.
The regulator did not mention the specific banks that were affected by the spike in defaults in the December-February period, but big banks are the ones that dominate big-ticket lending due to their large balance sheets.
Reduced risks associated with unpaid debt has seen a deeper cut in loan loss provisions, which emerged as a key driver to the triple-digit profits reported in Kenya’s banking sector.
Tier-one lenders cut their provisioning for bad loans by Sh49.3 billion last year to Sh60.1 billion, which helped them raise their net profit by 72.4 percent to Sh140.5 billion.
Some of the other sectors generating the new defaults could be suffering from the lingering impact of the Covid-19 pandemic.
Tourism and hospitality, which was the worst hit by the pandemic, is yet to fully recover from the travel slump that followed restrictions to curb Covid-19. The industry has started to pull out of its deep Covid-19-induced slump as local travellers take advantage of lower prices, but foreign visitor numbers are still well below pre-pandemic levels.
The defaults in the property market are a reflection of the struggles that mortgage holders are undergoing in an economy that has witnessed a string of job losses in the wake of the pandemic.
The slowdown in real estate is hurting property developers who are finding it difficult to sell units that were built on loans.
Banks that had gone slow on property seizures last year following the pandemic have stepped up debt recovery efforts to clean up their loan books, leading to a spike in auctions.
Auctioneers reckon they made more forced sales this year compared to the second half of last year, arguing that banks are moving much faster to seize properties from defaulters.
There has been a glut of repossessed homes, cars and office blocks on the market, which bankers are struggling to sell in Kenya’s recovering economy.
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