Loan defaults jump Sh30bn during lockdown

Workers and businesses defaulted on loans worth Sh30 billion in the four months to June when Kenya imposed stringent measures to contain the spread of the coronavirus.

Data from the Central Bank of Kenya (CBK) shows that non-performing loans (NPLs) rose to Sh379.9 billion in June, up from Sh349.9 billion at the end February — the sharpest four-month increase in recent history.

The NPL growth emerged in a period when Kenyans deferred payments on nearly a third of the bankers’ total loans, a pointer that defaults — which is credit that remains unpaid for more than 90 days — could have been worse without the credit rescheduling.

The ratio of NPLs rose from 12.7 per cent in February to 13.1 per cent — the highest since August 2007 when it stood at 14.41 per cent.

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 pace of private sector credit growth has slowed to a five-month low as banks cut lending, fretful of defaults and the second wave of loan restructuring applications as the financial crisis persists.

CBK data shows credit to 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.

“The NPL increases were noted in the manufacturing, trade and personal sectors due to a subdued business environment,” said the CBK.

The current NPL figure shows that banks are losing an average of Sh131 for every Sh1,000 loaned despite the average loan price having fallen to 29-year lows at 11.92 per cent in April.

The defaults also came in a period when banks have restructured loans worth Sh844.4 billion, or 29 per cent of industry total credit, to ease the pain for borrowers and to avoid a sharp increase in defaults.

The restructuring involved non-payment of loans for up to three months and extension of credit tenures, which translates to lowering of monthly repayments.

Personal and household loans top the list of debt restructured since March when the CBK allowed lenders to offer relief to distressed customers after the country reported its first coronavirus infection.

The persistent spike in bad loans highlights the depth of economic hardship the Covid-19 pandemic has brought on borrowers, with banks now taking a cautious approach to issuing out fresh loans.

The rising defaults will likely set the stage for property seizures as banks move quickly to auction securities to recover their money.

President Uhuru Kenyatta on July 6 announced a phased reopening of the country from a Covid-19 lockdown, lifting restrictions on travel in and out of Nairobi and Mombasa and allowing air travel to resume.

The restrictions together with a ban on public gatherings and a night curfew were imposed in early April.

Kenya had confirmed 23,202 cases of the coronavirus, with 388 deaths by Tuesday.

The outbreak has battered the economy, with the Treasury projecting growth to slow down to 2.5 per cent this year from 5.4 per cent last year, due to the impact of the Covid-19 pandemic.

Several banks are preparing for borrowers who had applied for a three-month freeze on loan repayments to apply for further extension. “We are still flexible and are prepared to continue to support our customers during these challenging times,” said Stanbic Bank Kenya chief executive Charles Mudiwa.

“We will consider further supporting our customers for a longer period should they experience distress.”