Banks, saccos warn of massive loan defaults

The financial institutions fear thousands of public sector workers - both at the national and county governments could default on their monthly loan obligations, having already missed initial deadlines for payment leading to a risk of an increase in bad loans for lenders with outstanding loans.

Asset quality

The lenders fear payment of the loans due could be complicated by the salary crunch further compounding the mountain of bad debt held by the financiers and affecting their asset quality.

This came as State House's top economic adviser David Ndii on Saturday hinted that the government is facing an acute cash crunch amid the unprecedented salary delays for civil servants at both the national and county levels.

To demonstrate the magnitude of the crisis, Dr Ndii revealed that President William Ruto's administration avoided a default on its sovereign debt obligations without divulging additional details on the economic risk.

A default is a failure by a country's government to pay its debt and has grave financial implications for the economy.

In interviews with The Standard on Sunday, civil servants who have maintained good credit records over time with their lenders and Saccos said they fear their credit histories will be tarnished - affecting their ability to borrow in future.

They said they also fear any potential defaults could set them up for sanctions and more pain of higher interest and property seizures from aggressive lending institutions.

Treasury CS Njuguna Ndung'u when he appeared before the Senate on April 5, 2023. [Elvis Ogina, Standard]

The mounting defaults are a reflection of the struggles that Kenyans are undergoing in an economy that has witnessed a string of job losses in recent months across nearly all sectors as corporates intensify austerity measures to protect profits.

New loans

CBK said recently the defaulted loans are mainly in the building and construction, manufacturing, and trade signalling that firms and individuals who had taken new loans on the strength of increasing cash flow with the reopening of the economy are struggling to service their loans.

"Increases in NPLs were noted in the trade, personal and household, manufacturing and building and construction sectors. Banks have continued to make adequate provisions for the NPLs," said CBK Governor Patrick Njoroge.

Banks have stepped up debt recovery efforts to clean up their loan books, leading to a spike in property seizures by aggressive lenders.

Households and businesses are reeling from the effects of high inflation, which has lowered demand for goods and services.

Kenyans are having to dig deeper into their pockets to purchase basic commodities as inflation edges up on high food and fuel prices. Data by the Kenya National Bureau of Statistics indicate that March inflation remained at 9.2 per cent, the same as in the previous month.

A severe drought earlier this year, biting inflation, job losses, a bank lending slowdown and prolonged political uncertainty are creating a growing pool of distressed borrowers whose assets are being seized by aggressive lenders.