RECOVERY

Banks bad loans to ease in the next quarter– CBK survey

NPLs had been on the rise for the most part of 2020 as most Kenyans suffered from the economic effects of Covid-19

In Summary
  • According to the latest credit survey report by CBK, 41 per cent of the respondents indicated that NPLs are likely to fall in the fourth quarter of 2021.
  • The lenders attributed their improved sentiment to enhanced recovery efforts being implemented by most of them.
CBK Headquarters
CBK Headquarters
Image: FILE

Non-performing loans(NPLs) in most banks is expected to drop in the fourth quarter of 2021, according to a Central Bank of Kenya report.

The lenders are attributing this to their improved business environment and enhanced recovery efforts.

CBK's latest credit survey report shows 41 per cent of respondents indicate NPLs are likely to fall in the fourth quarter of 2021.

However twenty six percent expect the level of NPLs to rise in the quarter as a result of the continued Covid-19 pandemic while 33 percent expect the NPLs to remain constant.

Bad loans were on the rise for the better part of 2020 as most Kenyans struggled from the economic effects of Covid-19 leading to loan defaults. 

This had started to improve as the economy recovered from the effects of the Covid-19 pandemic.

According to the CBK data, the rate of non-performing loans in the country eased further by 10 basis points in August to 13.9 compared to 14 per cent in June.

The reduction in defaults saw banks’ pretax profits for the nine months to September grow by 63.1 per cent, overtaking 2020 full-year earnings, according to the report.

The earnings hit Sh145.48 billion in the review period, up from Sh89.2 billion that was posted in a similar period last year.

Respondents indicated that the level of NPLs is expected to remain constant in ten economic sectors and fall or remain unchanged in the trade sector.

For the quarter ending December 31, 2021, banks expect to intensify their credit recovery efforts in all economic sectors.

The intensified recovery efforts are aimed at improving the overall quality of the asset portfolio.

Most respondents noted that the IFRS 9 had a negative impact on banks’ capital adequacy requirement due to increased provisioning for bad loans.

Beginning January 1, 2018, banks must make provisions for expected loan losses other than those already incurred following the adoption of the International Financial Reporting Standards (IFRS 9).

This resulted in banks’ injection of additional capital to accommodate the expected rise in credit losses and development of internal rating models to assess credit risks on all sectors including SMEs, and revamping their credit recovery efforts.

During the quarter ended September 2021, 68 per cent of the respondents indicated that their liquidity position had improved.

The liquidity ratio remained above the minimum statutory ratio of 20 percent.

The banks intend to deploy the additional liquidity by investing in Treasury Bonds (23 percent), lending to the private sector (21 percent), investing in Treasury bills (19 percent)  interbank lending (19 percent.

Others include taking advantage of CBK liquidity management through repos (12 percent), investing in other instruments including offshore (3 percent) and increasing their cash holding (3 percent).

In the third quarter of 2021, credit standards remained unchanged in eight economic sectors and were tightened in two sectors (Tourism and Real Estate).

Tightening of credit standards in the two sectors was attributed to the adverse effects of the pandemic.

This was to avoid possibility of non-performing loans as a result of the pandemic.

In personal and household sector, 39 per cent indicated that the credit standards were both tightened and remained unchanged.