Kenya lenders plan to step up asset seizures over bad loans
Sunday February 25 2024
Data by the Central Bank of Kenya shows that the banking sector’s gross non-performing loans increased by 25.67 percent to $4.37 billion in November 2023, from $3.48 billion in the same period in 2022. PHOTO | SHUTTERSTOCK
Kenyan banks plan to step up asset seizures as part of a strategy to recover overdue loans, the Parliamentary Budget Office (PBO) has said, pointing to more pain for distressed borrowers.
The PBO disclosed that lenders have indicated “intentions” of attaching borrowers’ collateral as part of the intensified credit recovery plan.
“The non-performing loans are spread across all sectors of the economy, and banks have indicated their intent to intensify credit recovery efforts, which may result in borrowers losing their collateral in the process,” the report says.
This means that in the case of a secured loan like a home or car loan, the bank can take over the asset that is used as collateral to secure the loan.
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An unsecured loan, on the other hand, is without any security or mortgage as a guarantee for repayment and is solely based on borrowers’ credit rating, hence, assets cannot be taken.
Data by the Central Bank of Kenya (CBK) shows that the banking sector’s gross non-performing loans (NPLs) increased by 25.67 percent to Ksh635.8 billion ($4.37 billion) in November 2023, from Ksh505.9 billion ($3.48 billion) in the same period in 2022.
The ratio of NPLs to gross loans increased by 150 basis points to 15.3 percent from 13.8 percent in the same period. The PBO attributed the increase in NPLs in the banking industry to the high cost of borrowing as a result of the central bank increasing its policy rate and the weak business environment.
Depreciation of the shilling, the high cost of fuel and other inputs, pending bills, and new tax measures have reduced household disposable income and purchasing power making it difficult for them to repay their bank loans.
Kenya Bankers Association (KBA) through a research note dated January 2024 had called for a halt to further rate increases to help prevent more loan defaults. KBA says current concerns in the credit market are around deterioration in the quality of loans after an estimated Ksh130 billion ($915.49 million) worth of the industry’s loan book turned bad in 12 months.
Households and businesses are under mounting pressure from rising borrowing costs after CBK raised interest rates to 13 percent in February 2023 to contain inflation and save the weakening shilling.
Kenya’s overall inflation increased to 6.9 percent in January 2024 from 6.6 percent in December 2023, according to the Kenya Bureau of Statistics, while the shilling exchange rate has rapidly gained ground against the dollar within a week to a high of Ksh142 from Ksh160.
Read: Moody’s sounds warning on Kenyan banks' defaults
For the quarter ended December 31, 2023, banks said they expected to intensify their credit recovery efforts in eight economic sectors and retain them in three sectors (mining and quarrying, energy and water, and financial services).
The main sectors that banks intend to intensify credit recovery efforts include personal and household (92 percent), trade (87 percent), and manufacturing (78 percent), transport and communication (76 percent), and real estate (73 percent).
A market perception survey carried out by CBK in January shows that the majority of businesses sampled (79 percent) expected economic uncertainty occasioned by the high cost of living to drive banks to become more cautious in lending to the private sector to minimise the risk of default.
On the other hand, the high cost of doing business as a result of expensive foreign currency, low business activities due to multiple taxes, as well as high-interest rates are expected to dampen private sector credit growth in 2024.