Banks hold back funds discharged from CBK reserves

Banks hold back funds discharged from CBK reserves

Commercial banks have held back funds released from the lowering of the Cash Reserve Ratio (CRR) in March by the Central Bank of Kenya (CBK).

According to a new banking sector report by Cytonn Investments, commercial banks have failed to advance the accrued funds as new loans to customers to instead build up liquidity buffers.

At the end of March, the CBK’s Monetary Policy Committee (MPC) agreed to lower the CRR from 5.25 to 4.25 per cent in view of releasing Ksh.35.2 billion in additional liquidity to banks to directly support borrowers distressed as a result of the COVID-19 pandemic.

However, the report which analyses listed banks states lenders have gone against the grain of their regulator to sit on the cash amidst the rising risk of borrowers.

“Banks have remained conservative by not really issuing new loans as mirrored by the increased liquidity in both banks and the financial markets. We have also seen no significant change to private sector credit growth,” noted Cytonn Investments analyst Rodney Omukhulu.

Private sector credit growth in 12 months to October for instance remained largely flat at 7.7 per cent when compared to an average 15 per cent in the years preceding the 2016 rate capping era.

“Banks are not lending aggressively due to higher credit risks. We foresee a slower growth in loans in the near term and thereafter if the pandemic persists,” the report states.

On the contrary banks have turned their holding of funds to government securities and in specific allocations to the short term Treasury bills (T-bills).

For instance, while growth in loans across the third quarter of the year was higher at 15 per cent from 11.6 per cent last year, growth in banks credit to government grew at a higher 47.5 per cent in the period from 3.3 per cent last year.

The ratio of loans to deposit inside the leading local banks has similarly fallen to 70.6 per cent from 75.7 mirroring the dip in customer lending.

This to keep the banks average interest income at a growth trajectory of 10.8 per cent in the period in spite of diminishing returns occasioned by the concentration of funds to the Treasury papers.

The switch to government securities comes as listed banks record an increased asset quality deterioration with the ratio of gross non-performing loans (NPLs) surging to 12.4 per cent from 9.8 per cent last year.

According to data from the CBK, banks had at the end of October accessed 92.7 per cent of funds from the lowering of the CRR in March or an equivalent Ksh.32.6 billion, supporting lending mainly to tourism, trade, real estate and manufacturing.

It is the true translation of funds from the lowering of the CRR to the real economy than analysts now doubt.

Greater capital and liquidity levels in banks are however a gain for the reserve bank which has backed the higher buffers to see through the banking sector stability to the end of the pandemic which has dragged down earnings and raised loan-loss provisioning costs.