Banks to step up seizures of assets on surge in bad loans

Kenya Bankers Association (KBA) CEO Habil Olaka. FILE PHOTO | NMG

Banks plan to step up asset seizures as part of a strategy to recover overdue loans, the Parliamentary Budget Office (PBO) has said, pointing to more pain for distressed borrowers.

The PBO disclosed that the lenders have indicated ‘intentions’ of attaching borrowers’ collaterals as part of the intensified credit recovery plan.

“Further, the non-performing loans are spread across all sectors of the economy, and banks have indicated their intent to intensify their credit recovery efforts, which may result in borrowers losing their collaterals in the process,” the report says.

Read: Bad loan woes return to haunt Tier-one lenders

This means that in the case of a secured loan like a home or car loan, the bank can take over the asset that is used as collateral to secure the loan.

An unsecured loan, on the other hand, is without any security or mortgage as a guarantee for repayment and is solely based on borrowers’ credit rating, hence, assets cannot be taken.

Data by the Central Bank of Kenya(CBK) shows that the banking sector’s gross non-performing loans(NPLs) increased by 25.67 percent to Sh635.8 billion last November from Sh505.9 billion in the same period the previous year.

The ratio of NPLs to gross loans increased by 150 basis points to 15.3 percent from 13.8 percent in the same period.

The PBO attributed the increase in NPLs in the banking industry to the high cost of borrowing as a result of the Central Bank increasing its policy rate and the weak business environment.

It said the depreciation of the shilling, the high cost of fuel and other inputs, pending bills, and new tax measures have reduced household disposable income and purchasing power, making it difficult for them to repay their bank loans.

The Kenya Bankers Association (KBA) through a research note dated January 2024 had called for a halt in further rate increases to help prevent more loan defaults in the industry.

The industry lobby group says current ‘concerns’ in the credit market mainly include the deterioration in the quality of loans after an estimated Sh130 billion ($915.49 million) worth of the industry’s loan book turned bad in 12 months.

Households and businesses are under mounting pressure from rising borrowing costs after the central bank increased interest rates by 600 basis points to 13 percent in February 2023 from seven percent in February 2022 to contain inflation and the weakening shilling.

Kenya’s overall inflation increased to 6.9 percent in January 2024 from 6.6 percent in December 2023, according to the Kenya National Bureau of Statistics, while the shilling exchange rate has rapidly gained ground against the US dollar within a week to a high of Sh142 from Sh160.

For the quarter ended December 31, 2023, banks said they expected to intensify their credit recovery efforts in eight economic sectors and retain them in three sectors—mining and quarrying, energy and water, and financial services.

Read: Bank loan defaults to hit 17pc by end of year

The main sectors, in which banks intend to intensify credit recovery efforts include personal and household (92 per cent), trade (87 percent), and manufacturing (78 percent), transport and communication (76 percent), real estate (73 percent).

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