New guidelines to make bank debts more transparent

NAIROBI, KENYA: Lenders look set to chalk up more bad debts after they picked up last year as higher rates bit and payments were withheld from Government contractors during the Kenya’s political transition.

But the short-term pain may herald long-term gain as another factor has been added to the bad loan mix - stricter enforcement by the Central Bank of Kenya (CBK) of its own prudential rules.

This holds out the promise of greater transparency, as investors will obtain a more accurate view of the state of the books and the quality of bank debt. “It will be very clear when looking at the numbers that these are the true numbers of non-performing loans, and therefore when reviewing a bank you can take a bolder position,” said Francis Mwangi, an analyst at Standard Investment Bank.

MORE PRUDENT

He also said a more no-nonsense enforcement would help ensure banks are more prudent when it comes to lending. “Much more importantly, it means banks have to be watchful about their lending practices.” Lenders reported Sh80.6 billion ($932.33 million) in non-performing loans last year, five per cent of total lending, up from 4.7 per cent in the previous year, according to CBK.

Analysts said the data, although no cause for alarm, opened the banks up to increased scrutiny, after five years of stellar growth in which some lenders doubled their loan books.

“It is something that one needs to continue assessing especially as credit is picking up,” said Ragnar Gudmundsson, the International Monetary Fund’s representative in Kenya. Bankers partly blame the stricter application of CBK rules on debt tolerance for the rise in known bad debts. KCB Chief Executive Joshua Oigara,, and his counterpart at Equity Bank’s  James Mwangi, said they were now required to write back distressed loans once they had been serviced for six months, up from a period of three in the past.

Sources in the banks who did not wish to be named said what had really happened was that CBK had started ensuring that the rule, which was always on the books, was now being followed more closely.

The end result will be a rise in bad loans or a more accurate reflection of the situation. “Bad debts are obviously going to grow because of the new regulations,” said Ochieng Oloo, publisher of an annual banking survey.

 CBK Governor Njuguna Ndung’u said the rule on reporting of bad debts was always contained in the prudential guidelines, declining to comment on whether enforcement had been stepped up in 2013. Tighter regulations or stricter enforcement compounded the trailing effects of the country’s macro-economic shocks of 2011, which sent commercial rates rocketing past 25 per cent, and the impact of a political transition after elections in March last year.  KCB, the largest lender by assets said its non-performing loans jumped to 8.1 per cent last year from 6.7 per cent.

 Equity Bank, ranked as the biggest bank by the number of depositors, saw its bad debts jump to 5.19 per cent from 3.1 per cent in the previous year. Oigara said some KCB customers faced difficulties after Government payments were delayed for several months.

START TO FALL

The Kibaki Government stopped paying contractors before the March 2013 polls to prevent irregularities while President Uhuru Kenyatta took several months to form a government, meaning contractors were only paid in the fourth quarter.

The delays had a knock-on effect on the sensitive building and construction sector, Oigara added. Executives in the industry said they were hopeful their bad debts would start to fall with this chapter behind them. “By June, we are confident that NPLs will come back to around four per cent or below four.  Most of them have started performing but we are unable to mark them as performing because we have to wait for six months,” said Equity Bank Chief Executive James Mwangi.  He said he expected the bank to close this year with bad debts at the traditional level of around 3 per cent.

Oloo, the publisher of the banking survey, cast doubt on this sort of benign forecast. “With the high interest rates that were there, there is a pack of non-performing loans that many banks are holding at the moment and it will take a while before banks are able to get them off their books.”

Kenya Bankers Association Chief Executive Habil Olaka defended the lenders, saying there was no cause for concern. “We haven’t even developed a trend yet,” he said, adding the numbers were for just one year.

He also blamed the rise in bad debts on banks diversifying to tap into high-yield segments like lending to small and medium enterprises (SMEs) “where the real opportunities are.”

“The downside is that you are bound to incur more exposure to credit risk,” he said. KCB has been shifting to lending to SMEs in a bid to diversify its loan book, which traditionally, has been focused on big firms who borrow in dollars and pay low interest rates.               

—Reuters