COMMERCIAL banks expect an upsurge in loan defaults in transport and communication sector in the first three months of 2014. This is due to tight regulations on public night travel services and unresolved political conflicts in South Sudan . A forecast of increased default in loan repayment is an indication of higher borrowing costs for companies in the sector, over and above the prevailing 17 per cent average lending rate. The December 2013 regulations have seen night travel in public passenger transport services ground to a halt, slashing earnings by public commuter companies. Banks further project the ongoing political mayhem in South Sudan to negatively impact businesses that export and transport directly to north west neighbouring South Sudan . Companies in energy and water sector have also been affected by the political instability in South Sudan , the lenders said in a quarterly credit survey by the Central Bank . The projected bad debt in the transport and communication will add to cyclical rises in non-performing loans in personal and household sector, usually linked to a reduction in disposable income in the first quarter. The reduction is as a result of increased one-off expenditures during the December festivities and back-to-school expenses in January. Last year, the banks carried Sh80.59 billion in bad debt on their books-- a jump of 30.91 per cent from Sh61.56 billion in December 2012 . "Credit risk is the single largest factor affecting the soundness of financial institutions and the financial system as a whole and lending is the principal business for most banks," the CBK observed in the report published last Thursday. Some banks have nonetheless predicted a general decline in bad debt in the quarter period to March 31 , citing ongoing cost cutting measures by the government which will bolster its ability to make prompt payments for development projects. This will correct last year's delayed payment to government contractors, they said, adding that stabilising interest rates and projected fall in inflation rate will also boost growth in economy. The 43-company banking industry in 2013 raked in Sh124.57 billion in profit before tax, according to the CBK report, representing a 16.89 per cent rise over year 2012. The increased profitability was largely attributed to cheap deposits whose cost cumulatively fell by Sh27.19 billion to Sh72.13 billion in December 2013 from Sh99.32 billion in December 2012 . An additional Sh220 billion in deposits were mobilised in 2013 to stand at Sh1.98 trillion. The industry's loan portfolio surged by Sh240 billion to 1.6 trillion in December 2013 , but the banks experienced a 3.57 per cent decline in interest income to 211.19 billion from Sh219.01 billion in 2012 due to a marginal reduction in lending rates in 2013. In fact, the slim 1.53 per cent rise to Sh357.90 billion in total earnings was boosted by a Sh11.52 billion slash in operating expenses to Sh233.32 billion in December 2013 from Sh 244.84 billion a year earlier.
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