Kenyan banks forecast drop in new loans as Covid-19 pandemic impacts sector

Local banks expect new loan accounts to shrink significantly in 2020 as the industry prices in the impact of the Covid-19 pandemic.

According to a new survey by the Kenya Bankers Association (KBA) 94 percent of surveyed member banks have observed adverse effects from the global health emergency hit.

As such banks are expected to shy away from taking on new risks and instead focus on existing credit portfolios to manage prevailing risks.

Research and Policy Director at KBA Jared Osoro expects lenders to focus their efforts to the restructuring of existing loans with respect to industry wide consensus to support borrowers through the crisis.

“Everybody is looking at a careful balance for those looking at support and those offering it. Even if the banking industry would be willing to offer credit, the effective demand from customers is limited,” he said.

“Most applications are on loan restructuring rather than requests for new loans.”

Following a meeting with commercial banks on March 16, the Central Bank of Kenya (CBK) announce measures to be undertaken by banks to alleviate the adverse effects faced by customers including the extension of term on loans by up to one year.

Other measures prompted banks to meet costs to restructured loans and eliminate charges for transfers between mobile wallets and bank accounts.

Data from the KBA survey shows 95 percent of lenders received requests on loan restructuring with the majority 86 percent of requests being on tenor extension and interest servicing.

57 percent of requests relate to loans to small and medium enterprises (SMEs) with customers favouring a 12 months extension of term to repayments.

Banks have reported their greatest lending exposure to the sectors of trade, households, manufacturing, tourism, transport and communication who account to loan portfolios of 30, 14, 17 and 10 percent respectively.

Kenyan banks stand well capitalized and liquid in the face of the pandemic with core and regulatory capital ratios to risk weighted assets standing at 16.8 and 18.8 percent respectively.

Even so, banks are out to elude risks with 72 percent of lenders expressing their disinterest in taking on more risks.

KBA Chief Executive Officer Jared Osoro says the prerogative for banks will be to come through the pandemic with minimal damage and to better shaped to support economic recovery.

“We need a stable system as we come out of this pandemic. As such banks will still be conscious of their exposure,” he said.

The banking industry gross non-performing loans rate is projected to hit 14 percent from the current 12.4 percent in March while the loan to deposit ratio is seen falling by more than 10 percent.

Assets growth is meanwhile seen contracting by up to 26.5 percent while industry capital adequacy is projected to decline by an average 2.5 percent.

The expected fall in new loans is expected to put brakes on recent growth in private sector credit which had begun rising steadily since the repeal of interest rate caps in November 2019.

Private sector credit for instance stood at a 44 months high 8.6 percent at the end of March.

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