Commercial banks cut their lending to parastatals by 14.7 percent in July compared to a similar period last year, the sharpest decline in four years. This comes as the State-Owned Enterprises (SOEs) struggle to service debts owed to their biggest lender, the government.
Overall, commercial banks, microfinance banks, and saving and credit cooperatives (saccos) jointly lent Sh78.9 billion to parastatals in July, a drop of 14.8 percent from the Sh92.5 billion they extended to the institutions during the same period last year, which was a growth from the previous period.
Most of this debt is owed to commercial banks, which extended loans worth Sh78.2 billion in July, from last year’s Sh91.7 billion, the latest data from the Central Bank of Kenya (CBK) shows.
The decline came amid growing defaults among parastatals on the State’s on-lent loans, which may have spooked the private lenders from increasing their loan books to the SOEs, many of which are also facing financial difficulties with dwindling revenues and profits.
Last year, 31 of the 54 SOEs did not make any payments to service their debts to the State, and the majority applied for their loans to be written off by the government during the 2022/23 financial year, an indication of the financial woes facing them.
Amid the struggles, CBK, which is the banking sector regulator, in 2022 urged banks to go slow on lending to parastatals, saying their borrowing primarily for recurrent expenditure risks their viability and could expose banks.
“The SOEs used long-term debt to finance operations expenses rather than investments to generate revenues to service future debt. This limits productivity, capacity, and profitability of SOEs and in turn their viability,” the regulator said.
Banks subsequently cut their lending to parastatals by 3.5 percent, from Sh78.6 billion at the start of the year to Sh75.8 at the end of the year.
However, they started increasing their loans to the SOEs again in 2023, hitting a high of Sh107.9 billion in October last year, before starting the cuts again.
Latest data from the Treasury indicates that amid the falling credit from banks, parastatals have resorted to borrowing from the State, which both guarantees their debt and lends to them from the exchequer.
In the financial year ended June 2024, loans to SOEs from the government rose by Sh231.2 billion to hit Sh1.26 trillion, highlighting the growing reliance of the parastatals on the exchequer for survival.
In contrast, banks’ lending to the State and county governments has seen an upsurge over the same period, following a rise in interest rates which has seen many private sector players shun credit.
Over the period, commercial banks’ loans to the government rose by 10.4 percent to Sh1.9 trillion, while those to the devolved units rebounded from a decline to post a 21 percent growth to Sh6.5 billion.
