Fresh Rise of Bad Loans on Hard Economic Times

Bank bad loans grew for the first time in four months in October last year underlining the effects of the economic slowdown on businesses.

Fresh data from the Central Bank of Kenya (CBK) shows the banking sector gross non-performing loans (NPLs) expanded by 2.5 percent to Sh504.2 billion in October from Sh491.8 billion in September.

It was the first increase in bad loans since June when they rose by 6.3 percent to a record high of Sh514.4 billion from Sh483.8 billion in May.

This reverses the sharp drop in NPLs in September where they fell by the largest margin in 15 years. The dud loans had shrunk by Sh13.2 billion between August and September to Sh491.8 billion, which was the biggest monthly drop in defaulted loans since June 2007.

The decline in NPLs came as lenders wrote off some billions of shillings in bad debt that they had lost hope of recovering and loan restructures that lengthened the tenure of the advances to ease the burden of repayment on borrowers.

The economic slowdown in the months to the August 2022 polls, however, hit businesses amid high inflation that curtailed demand, especially for consumer products hitting firms with cash flow challenges.

The recent Credit Officer Survey conducted by the CBK shows nearly a third of respondents of the study expected bad loans to rise further during the economic slowdown even as banks expect to step up loan recovery efforts in the main sectors hit by the defaults.

Kenya’s gross domestic product (GDP) grew by 4.7 percent in the third quarter ended September compared to higher growth of 9.3 percent in a similar period last year, according to the Kenya National Bureau of Statistics (KNBS).

“29 percent of the respondents expect the level of NPLs to rise in the fourth quarter of 2022. The increase in NPLs is mainly due to subdued business activities because of slowed recovery from the coronavirus (Covid-19) pandemic,” said the survey.

The sector most hit by the loan defaults is trade, manufacturing and infrastructure.

“For the quarter ended December 31, 2022, banks expect to intensify their credit recovery efforts in eight economic sectors and remain constant in three sectors (mining and quarrying, energy and water, and financial services). 

The intensified recovery efforts are aimed at improving the overall quality of the asset portfolio,” it said.