Credit crunch bites as banks in Kenya play it safe after rate cap law

Central Bank of Kenya building. More strict reporting requirements by the regulator have translated into more bad loans for lenders. [PHOTO: FILE/STANDARD]

Commercial banks are tightening loan request approvals, making it harder for borrowers to access credit.

Central Bank of Kenya (CBK) yesterday said there was a sharp rise in the number of loan applications since August – when the law capping interest rates came to effect.

But over the same period, the lenders have granted fewer loans, a pointer to the fact that the banks are unwilling to take the risk of providing credit at the prevailing interest rates.

CBK Governor Patrick Njoroge, however, declined to link the interest rate regulation to the slowdown in new loan approvals, claiming the banks were realigning their business models.

“Slowdown in credit growth is not related to the interest rate cap law,” said Dr Njoroge of the seemingly alarming credit squeeze where several banks have reported shrinking loan books.

Emboldened by the interest rate regulations that currently caps the cost of loans at 14 per cent, (Central Bank Rate of 10 per cent plus allowable margin of four per cent), prospective borrowers have been flocking banks to seek credit only to be turned away. It was predicted that regulating the lending rates would boost credit appetite by making it cheaper and attractive to borrow, but the resultant slowdown seems very much a supply-side problem on the part of banks. Credit to the private sector grew by 5.3 per cent in the three months to September in the slowest growth in eight years, but the full impact of the rate-capping law that took effect on August 24 would be felt in the current quarter.

“Banks have been adjusting their business models since the new regime came in,” said the CBK boss in dispelling fears that the credit contraction was a result of interest rate regulation. Dr Njoroge attributed the stricter lending criteria among banks to internal decisions taken in the last financial year, where reporting requirements by CBK have translated into inflated bad and doubtful loans among all lenders.

NON-PERFORMING LOANS

Banks are now required to adhere to an uncompromising classification of loans as non-performing if the borrower has not repaid in 90 days – while they previously had a broader latitude of determining when to call a credit facility to be in default.

With a bigger proportion of loans either in default or doubtful standing, banks are required to set aside more resources, technically known as provisions - which are accounted for as expenses - to absorb the shock in case the borrowers are unable to pay.

Declining loan books in the banking industry have a huge spiral effect on the private sector through lower consumption and the risk of massive lay-offs among banks as they seek to remain profitable. Several lenders have already announced redundancies, owing to the anticipated drop in profits linked to the interest rate-capping regime, while others are at different stages of executing lay-offs.

But Dr Njoroge said banks were now “earning” their profits in the regime of interest rate caps unlike previously where they made easy money from expensive loans at the expense of borrowers.

Independent institutions, which are big advocates for free markets, have warned the rate cap and the slowdown in credit to the private sector could have huge implications for the economy.