Commercial banks have been pulled into a model that may lead to tightening lending rules to borrowers.
Yesterday, Kenya Deposit Insurance Corporation (KDIC) announced the revision of the current flat-rate premium model to risk-based premium model for the banking sector, a move expected to instil market discipline and safeguard bank depositors.
The new model that will take effect in July 2020 will see the scrapping of the current rate of 0.15 per cent of total deposits held by KDIC and in its place introduce a system where the premium charged will be based on an individual bank’s risk appetite.
The amount to be paid by the banks will depend on the risks determined by liquidity ratio, asset quality and level of non-performing loans (NPLs).
Hence, the higher the risk, the higher the premium paid to KDIC.
Through this, banks will be expected to streamline their operations, maintain adequate capital levels and liquidity in order to minimize their risk exposure.
“The issue of giving loans without collaterals will go because it increases their risks,” KDIC chief executive Mohamud A Mohamud said.
The risk-based premium rate will support the Revised Deposit Coverage Limit that has been increased to Sh500,000, a move set to protect depositors and also encourage saving in the institutions.
This means account holders with more than Sh100,000 in a bank would stand to access their deposits from July 1 next year, in case a bank collapsed.
Mohamud sentiments hold with Cytonn Investments who have said banks will continue employing prudent loan disbursement policies.
In their recent report for the 11 Nairobi Securities Exchange-listed banks, Cytonn indicated that there has been a deteriorating asset quality among the banks.
This was indicated by the rise in the NPLs ratio to 10.0 per cent in the six months to June, from 9.8 per cent in H1 2018, much higher than the five-year average of 7.6 per cent.
“We still expect banks to consequently tighten their credit standards, in order to address these concerns around asset quality,” the report stated.
With a tighter operating environment, diversification of revenue, cost management and asset quality management will be the key growth drivers for players in the banking sector.
The situation may mean a tougher market in lending, disputing the improved credit expansion to the private sector.
In September, the Parliament's finance committee blocked a move to scrap the cap on commercial lending rates imposed by lawmakers in 2016.
In its budget proposals to parliament in June, the finance ministry sought to repeal the rate cap, arguing that it has constricted private-sector credit growth as banks shunned lending to customers deemed risky, including small and medium-sized businesses.
Despite this, the average loan growth came in at 9.8 per cent in the first half of 2019, which was faster than the 3.8 per cent recorded in H1’2018, indicating an improvement in credit extension to the economy.
Government securities, on the other hand, recorded growth of 12.1 per cent, which was a slower growth rate compared to the 14.9 per cent in H1’2018.
At the same time, deposit growth came in at 8.6 per cent for the 11 lenders, slower than the 10.0 per cent growth recorded in H1’2018.
According to Mohamud, the move to increase the premium will enhance stability in the financial markets especially on account of collapsed banking institutions due to liquidity and capital issues.
Between 2015-2016, the banking sector has experienced turbulence leaving three banks among them Imperial Bank, Chase Bank and Dubai Bank under receivership.
As a result, the majority of depositors are left troubled.
The depositor cash protection incentive will lead to an increase from 8.2 per cent of deposits covered by KDIC in case of banks' failure to 20 per cent.
“The public assets will be fully covered in the unlikely event of a failure and account holders will access the money within 30 days,” Mohamud said.
Currently, deposits of more than Sh100,000 are settled after the resolution of banks' assets leading to losses to shareholders.
About 98 per cent of deposits in banks will be fully covered after implementation.
“We want to ensure that the banking sector is sound and strong,” Mohamud added.
