BY JAMES MULIRO
Sluggish economic activity and poor performance by companies are expected to dampen outlook in the banking industry with majority of players expected to report an increase in bad loans this year.
This is according to a banking sector report released recently by the Central Bank of Kenya (CBK) last month. The ‘Credit Officer Survey’ covering the state of the banking industry in 2015 and giving a forecast of how 2016 is likely to turn out, indicates that the “perceived poor business environment” is likely to hurt the sector, with bad loans expected to remain way above the Sh100 billion mark.
“Some respondents predicted that the perceived poor business environment, low liquidity in the economy, high interest rates/residual effect of the interest rise in the previous year and government cash flow constraints as a hindrance to their performance,” the CBK said in the report.
Of concern is that fact that other bank officials cited the high cost of funds as a result of higher interest rates and a slump in economic activity would affect not just their balance sheets but other companies as well. This effectively means that all the companies affected by the high cost of loans and the gloomy business environment are likely to report difficulties in repaying their loans in 2016.
The small and medium enterprises are projected to be the most affected as most of them lack the requisite cash flow to boost their operations or to meet routine expenses.
“Most of the banks expect the NPLs (non-performing loans) level to increase, with 46% of the respondents indicating so… 22% of the respondents feel that the NPLs level will remain unchanged,” the report says.
The weak Kenya shilling relative to the US dollar has not made matters any easy. This is due to the fact that importers are likely to cut down on their merchandise or raw materials import as a result of decline in profitability arising from a weak shilling.
In 2015, total non-performing loans in the banking industry stood at over Sh125 billion. The rate of bad loans has increased rapidly since 2011 when interest rates rose to about 30% when Kenya experienced one of the worst economic instability in recent years. In 2011, the stock of bad loans stood at KSh53 billion but the current level continues to worry bankers more even as prospects of economic growth remain gloomy. Debts are often regarded as bad loans or NPLs when they are not serviced after three months.
Banks however, plan to intensify their loan recovery efforts in all sectors of the economy to minimise the impact that bad loans are likely to have on their profitability and on the quality of their assets. Sectors such as tourism, mining, trade, and energy are among those that are likely to experience the most intense loan recovery efforts.
This means that key sectors such as tourism are expected to suffer even more despite the on-going recovery efforts following years of nose-diving. The government has already cut the budget for marketing the tourism sector by Sh3.4 billion, leaving the recovery of the sector to hang in doubt. Kenya had already begun running promotions of its tourism products on international news channel CNN, gearing up recovery efforts of a sector that has suffered the brunt of terrorist attacks by the Al Shabaab.
Nearly half of banks expect the poor performance of the tourism sector to worsen the NPLs portfolio “due to spill over of delinquencies attributed to the previous spate of insecurity in the country and previous adverse travel advisories”.
Only a couple of banks remained hopeful that recovery in the tourism sector would persist in the coming months especially following the lifting of travel advisories against Kenya by US and UK governments.
Even as bankers paint this not so rosy picture, different entities continue to blame them for having a cartel like behaviour in their control of interest rates. Just last month, the World Bank said that a few large lenders have gained control over the country’s lending market and this had left in its wake disturbing consequences on the economy.
Banks have often been blamed for maintaining high rates and profiting ‘excessively’ even in times when the economy has not been performing well. They have consistently maintained their margins at around 10% while offering depositors save very little for their funds.
Nevertheless, with the increase in NPLs, the lenders’ asset quality will continue to deteriorate as they have to keep raising the amount of money set aside to cover defaults. Such provisions, often accounted for as operating costs, dig into their profits.