State revels in cheap credit as banks reel from rate cap law

Traders view the trading board at the Nairobi Securities Exchange. Banks are doing brisk business from trading in State-issued bonds. [File, Standard]

Commercial banks have flooded the Government with cheap credit that has now become Treasury’s preferred funding source at the expense of Central Bank’s overdraft facility.

In last week’s auction, the 91-day Treasury Bill (T-bill) got 381 per cent performance rate, while the 182-day paper got 255 per cent interest and the 364-day bill received 94 per cent subscription. The banks’ overwhelming interest in Government’s debt instruments has aided Treasury make the most of the readily available cheap credit.

The 91-day T-bill currently trades at a record low of 8.4 per cent, while the full-year Treasury bond trades at an average of 10 per cent each.

A Treasury bill is paperless short-term borrowing instrument issued by the Government through the Central Bank to raise money on short-term basis, which is a period of up to one year. Bonds have a longer term.

Negative effect

The availability of the cheap credit has seen the Government settle all outstanding overdraft facilities at CBK for the first time in five years. This has been made possible by banks and institutional investors that have flooded it with money.

Deepak Dave of Riverside Capital said the problem with such a situation was that the money that would be lent to the private sector was now concentrated in the hands of Government, which will have a negative effect on the economy in the long-term.

Banks prefer the debt instruments as they are considered to have little or practically no risk attached to them instead of loaning to high risks individuals and private sectors. “This is unusual. I suspect the Government’s Treasury bills and bonds auction continue to go strong since banks are flooding all their lending cash into the state sponsored debt securities... the situation is unfortunate,” he said.

In the last five years, the National Treasury has failed to clear its overdraft with CBK at the end of each financial year.

By June 2013, close to 3.2 per cent of government debt was owed to CBK, in 2014 a similar proportion was still owed to the government banker.

In 2015 the CBK overdraft component reduced to 2.3 per cent of the state’s domestic debt and last year it rose to 2.5 per cent by June. This year, however, Treasury cleared its overdraft in April and the facility has remained at zero per cent as of this month.