Loan defaults hit new decade high as corona erodes income

The number of borrowers defaulting on loan repayment is at a new decade high with the steep climb attributed to the impact of Covid-19 on incomes.

Latest data by the Central Bank of Kenya (CBK) shows the the default rate grew to 13.6 per cent in August compared to 13.1 in June. 

This is  the highest since 2007 when the default rate was  14.1 per cent. 

Speaking at a post-Monetary Policy Committee (MPC) meeting on Wednesday, CBK governor Patrick Njoroge said the growth in Non Performing Loans was dominant in the real estate, personal, transport and communication sectors, due to a subdued business.

The real estate sector reported the highest rate of NPLs at Sh4.7 billion on low occupancy rates and rent defaults.

The Survey on Socio-Economic Impact of Covid-19 on Households Report by the Kenya National Bureau of Statistics released in July showed that 37 per cent of Kenyans were unable to pay their May rent.

The survey,  carried out in June involving 14,616 respondents showed that 61 per cent of those who did not pay rent attributed it to the reduced income, which affected different companies.

Up to 25.7 per cent said that they did not pay rent due to temporary layoffs and closure of businesses, 8.1 per cent attributed the failure to delayed income while 3.5 per cent could not pay rent following permanent layoffs and closure of businesses.

Unpaid Personal or household loans as at end of August stood at Sh3.7 billion due to narrowing income mainly as a result of job losses.

Defaulted loans in the transport sector hit Sh3.6 billion mainly due to an inter-county travel ban announced in March as a containment measure to avert the spread of coronavirus. The building and construction industry is also highly affected, with NPLs rising to Sh3.4 billion.

According to Njoroge, these are pre-March loans that were on the watch list.

Banking sector analyst Nelly Ambasa told the Star that the rise in NPLs is not unique to Kenya, adding that the trend is likely to go beyond next year as the global economy slowly heels from the impact of Covid-19.

In July, a Mckinsey‘s report titled 'Managing and monitoring credit risk post-Covid-19' projected debt default to increase, with countries like Norway, France, Italy, the US, and Spain reporting a decade high.

''In response to the crisis, leading financial institutions are beginning to approach underwriting and monitoring with a new configuration of sector analysis, borrower resilience, and high-frequency analytics,’’ Mckinsey said.

Kenya’s highest NPL was reported in November 2001 at 33.4 per cent while the lowest debt default rate in the country’s history is at 3.5 per cent reported in 2012.

Total loans amounting to Sh1.12 trillion representing 38 per cent of the banking sector loan book of Sh2.9 trillion had been restructured by end of August in line with the emergency measures

Announced by CBK on March 18 to provide relief to borrowers.

This is an increase compared to Sh844. 4 billion of total loans restructured in June, representing 29 per of the total loan book.

Of this, personal loans worth Sh271 billion or 33 per cent of the loan book in the sector had their repayment period extended.

For other sectors, a total of Sh849.9 billion had been restructured mainly to trade (20.7 per cent), manufacturing (20.2 per cent), real estate (18.3 per cent) and agriculture (11.1 per cent). These measures have continued to provide the intended relief to borrowers.