Banks faced a high risk of non-performing loans in 2013 as the cost of living and interest rates took a toll on households, undermining customers' capacity to service loans. The situation was further compounded by delayed payments by the government to contractors for completed projects. This greatly affected the repayment patterns of customers in the building and construction sector. Given the high interest rates currently prevailing in the market, the situation might continue to worsen, although the banking sector continues to experience growth. According to the latest Central Bank of Kenya report, Credit Survey for 2013, the banks faced an upsurge in credit risk, with the gross non-performing loans (NPLs) rising by 30.9 per cent to Sh80.6 billion at the end of 2013, compared with Sh61.6 billion at the end of 2012. This prompted a number of banks to tighten their credit standards for customers in the building and construction sector in the second half of 2013. "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 Central Bank said in the report released on January 30 . This is despite an increase in demand for loans in all the economic sectors surveyed occasioned by the peaceful General Election in March 2013 and a stable macro-environment in the period. The demand came strongly from the transport and communication, trade, manufacturing, and agriculture sectors, pushing up total loans to Sh1.60 trillion in 2013, compared with Sh1.36 trillion in 2012. The banks also enhanced their credit recovery efforts in all the 11 sectors surveyed in tandem with the increased demand for credit in the period. They also continued to exercise strict credit standards as they remained cautious in a bid to forestall possible major defaults. The high credit risk is, however, expected to prevail, especially in the first quarter of this year. This threatens to eat into banks' earnings. "Non-performing loans in the personal and household sector are expected to rise due to cyclical reduction of customers' disposable income as a result of increased expenditure by customers during the December/January festivities. "In this regard, some banks indicated their intention to marginally intensify their credit standards so as to mitigate any possible default risk," the CBK said. Industry unaudited pre-tax profits rose by 16.89 per cent to Sh124.57 billion in the full year period ending 2013, from Sh107.68 billion registered in a similar period in 2012. The survey, which is done on a quarterly basis, targets the senior credit officers of all 42 banks and one mortgage finance company. The 11 sectors surveyed include agriculture, manufacturing, building and construction, mining and quarrying, energy, and water. Others are trade, tourism, restaurant and hotels, transport and communication, real estate, financial services and personal/household. Analysts expect credit uptake to increase this year in virtually all the sectors of the economy with the issue of the sovereign bond targeting to raise $1.5 billion (Sh130 billion). They say the sovereign bond issue will release the "pressure valve" on demand for credit from the domestic market by the government, which has been active in the short- and long-term bonds, to raise money to meet budgetary shortfalls. The National Treasury has also indicated that the high interest rates will only be addressed once and for all by a proposed legislation, which will overhaul governance at the CBK. The proposed legislation comes in the wake of constant accusations levelled against local commercial banks that they make huge profits at the expense of borrowers. The banks have over the years maintained double-digit spreads by offering depositors or savers meagre rates on their funds.
Most Popular Stories
- Obama Administration Releases Proposal to Regulate For-Profit Colleges
- Apple, HP, Intel May Take a Hit from Slowdown in Smartphone Sales Growth
- FDIC Files Lawsuit on Behalf of Banks Allegedly Hurt by Libor Scandal
- Some California Cities Seeking Water Independence
- SoCalGas Reaches Record Spend on Diversity Suppliers
- Motley Crue's Nikki Sixx Marries Model Courtney Bingham
- Chinese e-Commerce Giant Alibaba Gears for IPO in U.S.
- Will Missing Malaysian Jet Prompt Aviation System Change?
- GM Recall Poses First Major Test for New CEO
- Obama Seeks to Stay Neutral in CIA-Senate Conflict