Sh423 billion bad loans headache for lenders

Central Bank of Kenya

Banks experienced a surge in bad debt in December as borrowers struggled to service their loans following the end of a repayment holiday granted to soften the blows of Covid-19.

The stock of bad loans rose to Sh423 billion, 14.1 per cent of banks’ total loan book that stood at Sh3 trillion, according to the Central Bank of Kenya (CBK).

This means that for every Sh100 that banks had lent out, Sh14 was non-performing loans (NPLs), which is credit not serviced for at least three months.

“The increase in NPLs was mainly attributed to disruptions in business activity due to the pandemic, delayed payments to contractors and low occupancy of housing and commercial units,” CBK said in its monetary policy statement for December.

CBK had brokered a deal with banks that saw borrowers distressed by the pandemic reschedule their loans.

However, the six-month loan repayment holiday came to an end at the start of October.

During the moratorium, banks largely concealed their claws with Sh1.63 trillion worth of loans restructured.

Of this, personal and household loans whose repayment was extended amounted to Sh333 billion.

There was also a freeze on listing defaulters with the credit reference bureaus.

Higher NPLs were recorded in the transport and communication, energy and water, tourism, restaurant and hotels, and real estate sectors.

Due to an increase in bad loans, banks put aside billions as insurance against possible defaults - which led to a decline in bank profitability.

By end of November last year, banks made a profit before tax of Sh107.7 billion, a drop of nearly a third from Sh150.1 billion that they made in the same period in 2019.

Most banks have issued profit warnings, projecting their profits to fall by at least 25 per cent for the 2020 financial year.

Borrowers are having a hard time repaying their loans following the adverse effects of the coronavirus pandemic that has caused businesses to collapse and workers losing their incomes. 

Economic activities reduced after the government imposed containment measures to curb the spread of Covid-19.

As a result, economic output shrank in six months between April and September with the deepest contraction of 5.5 per cent occurring in the second quarter of last year.

In the third quarter, the economy picked up with the partial re-opening of schools and businesses.

The country’s gross domestic product contracted by 1.1 per cent in the third quarter.