Banks freeze new lending on renewed COVID-19 fears

Private sector credit growth collapsed back 7.7 per cent in March, the lowest rate since October as banks froze new loan issues on renewed pandemic fears.

According to new data from the Central Bank of Kenya (CBK), net loans advanced by the banking industry shrunk to just Ksh.105 million during the month.

The truncated loans disbursements have served to roll back credit by banks to the private sector which neared pre-interest capping levels in January and February.

Private sector credit growth at the start of the year for instance stood at 9.3 and 9.7 per cent respectively.

The growth in loans to the sector is yet to break the double-digit ceiling since June 2016.

The freeze in lending is at the same time attributable to unchanged demand for credit by businesses who may as well be staring at uncertainty arising from the pandemic.

Data from a credit survey covering the first quarter of 2021 by the CBK for instance shows the perceived demand for credit remained unchanged in seven key economic sectors, only increasing in three and reducing in one sector.

Perceived demand for credit decreased significantly in the real estate sector from the subdued demand for housing units.

The majority of 39 surveyed commercial banks at 71 per cent cited COVID-19 as the only factor negatively affecting the demand for credit in the period.

The strain exerted by the COVID-19 pandemic has seen lending fail to capture the heights projecting after the lapse of the interest rate capping regime in November 2019.

A majority 82 per cent of banks indicated the demand for credit remained unchanged after the repeal of the interest rate capping law.

At the same time, 76 per cent of respondents in the survey noted the repeal had no effect on their lending to small and medium enterprises (SMEs).

The balance of 24 per cent however highlighted a spike in lending to SMEs on the adaptation of risk based pricing models.

Frozen lending by commercial banks has been accompanied by a rise in the banking sector stock of non-performing loans (NPLs) with the rate of loan defaults topping 14.6 per cent in March from 14.1 per cent in December.

Commercial banks have made proposals for CBK to consider further measures to mitigate the impact of the pandemic on operations including additional funding at concessionary rates and the roll out of credit guarantee schemes.

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