CBK urged to relax rules to banks on loan defaults

The Central Bank of Kenya (CBK) has been urged to relax loan-loss provisioning rules to commercial banks as loan defaults pick up.

Analysts at Cytonn Investment say the present guidelines will see commercial banks set aside more billions in expected credit losses and subdue the industry’s profitability.

“In our view, further relaxation of provisioning rules by the CBK, as part of the prudential guidelines would be a welcomed move. This would be in the form of adjustment to the loan classification in different categories,” they noted.

The plea to the banking sector regulator comes as the asset quality of banks continue to deteriorate under rising defaults brought forth by the COVID-19 pandemic.

According to data from the CBK, the ratio of non-performing loans to gross loans rose to 13.1 percent in April from 12.5 percent in March or an equivalent Ksh.367 billion.

The significant rise in loan defaults is despite the allowance for loan restructuring by up to one year on loans performing at March 1.

On Thursday, National Treasury Cabinet Secretary Ukur Yatani revealed the industry had restructured Ksh.360 billion in loans including Ksh.190 billion worth of credit to households and individuals.

The rise in defaults has consequently seen banks set aside billions as provisioning for expected credit losses in line with recent changes to accounting standards-the IFRS 9.

According to Cytonn’s first quarter banking sector report, the non-performing loans (NPLs) coverage by publicly listed banks increased to 57.4 percent from 54.5 percent on the first three months of 2019 in tandem with rising defaults.

Meanwhile, the Kenya Bankers Association (KBA) expect the bad loans stock to rise to 14 percent by the close of the year while an analysis by Callstreet Research and Analytics place the NPLs at a worse off 18 percent.

Presently, loans are classified under four interpretations ranging from normal to loss.

An advanced loan is declared a loss when the credit is considered uncollectible or of such little value that their continuance recognition of it as a bankable asset is not warranted.

Substandard loans are meanwhile termed as those with primary sources of repayment not sufficient to service the debt and the institution must look to secondary sources such as collateral for repayment.

In these category, both principal and interest due lies unpaid for more than 90 to 180 days.

Doubtful loans meanwhile cover loans with substandard characteristics but are not well secured and have principal or interest due as unpaid for over 180 days.

Loans on the watch list, on the other hand, exhibit potential weaknesses and have principal or interest due as unpaid for between 30 and 90 days.

Pressed on the rising sector vulnerabilities, CBK Governor Patrick Njoroge moved to alleviate fears of a fall out from higher industry non-performing loans as he expects the bad loans to correct in a near-term economic rebound.

“The issue of NPLs is not mechanical. This are highly exceptional times and it’s not the individual borrower credit risk that has change. If everything was as it were before, the credit rating would not have been altered,” he told a May 28 news conference.

“Banks shouldn’t been penalizing themselves for the risk and neither should they penalize borrowers.”

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