Banks have cut the cost of credit to all-time low and reduced appetite to extend credit to high-risk borrowers in the wake of the Covid-19 pandemic that has raised defaults to a 13-year high.
Latest Central Bank of Kenya (CBK) data shows that lending rates have fallen to an average of 11.89 percent in June following a consistent drop in the banking regulator’s benchmark lending rate.
This is the lowest average lending rate since the CBK started disclosing the rate in July 1991 during the reign of the then governor Eric Kotut under the Moi regime.
The drop has eased fears of a rise in the cost of credit after the removal of the interest rate cap last November following pressure from banks and the International Monetary Fund (IMF).
The removal of the legal cap led to fears of a likely return to the era of high cost of loans, which had at one point hit 25 percent.
However, banks are taking a cautious approach in extending fresh credit in an environment where companies and individuals are increasingly seeking moratorium on their loans in the wake of the health crisis.
Industries and other businesses have since cut down on their activities in response to the infectious disease, leading to job cuts and unpaid leave for retained staff as profitable firms move into losses.
This has seen workers who had tapped mortgages and unsecured loans for purchase of goods such as furniture and cars and expenses like school fees default. Unsecured loans are given on the strength of one’s salary. Firms that had borrowed based on the forecast of cash flows have also been struggling to repay their bank loans.
“The pandemic has affected both the supply and demand side of the credit. The growth is not so much just driven by price. An entity trying to survive the pandemic will not necessarily borrow more because of reduced price,” said Habil Olaka, CEO of Kenya Bankers Association.
The CBK data showed that credit to the private sector expanded by 7.61 per cent in the year to June to hit Sh2.69 trillion.
This is the slowest pace since January when it grew at 7.3 per cent, well below the ideal rate of 12-15 per cent.
A slowdown in business activities and the uncertain future caused by the Covid-19 pandemic globally has forced many companies and investors to put a freeze on expansion plans.
Despite the reduction in the price of credit, however, there has been an increase in non-performing loans.
Data from the CBK shows that the ratio of non-performing loans (NPLs) rose from 12.5 per cent to 13.1 per cent in April — the highest since August 2007 when it stood at 14.41 per cent.
Defaulted loans — which is credit that remains unpaid for more than 90 days – jumped to Sh379.9 billion in June from Sh349.9 billion in February.
The Sh29.95 billion increase is the largest four-month rise in the recent history after Kenya imposed restrictions to curb the spread of coronavirus.
Banking sector executives had told the CBK in a July perception survey that debt defaults and slowed economic activities were their key concerns.
“The limited activity in the education sector, concerns over debt obligations, and reduced development spending were cited as risks to this optimism,” said CBK in the survey.
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