More than eight per cent of all loans issued by commercial banks to borrowers are in default, the Central Bank of Kenya has reported.
It is a sharp rise from February when only 6.8 per cent of the loans were classified as non-performing, in a new reality that had for long been concealed by lenders.
CBK Governor Patrick Njoroge said yesterday that the NPLs portfolio had shot up to 8.16 per cent at the end of last month on account of stricter reporting requirements.
“When the auditors went through the numbers, they pointed out that the loans were not perming as the banks had claimed,” Dr Njoroge said yesterday while addressing a press conference.
It would turn out that lenders were understating the bad loans in their books, and in effect exaggerating their financial positions. NPLs, also known as bad loans, were reported at only 5.7 per cent in 2015.
While the new levels could be worrying for the banking sector, Njoroge is optimistic that the current disclosure will help in identifying the problem and finding the effective remedy.
“When we know the problem, the patient is half-way healed,” said the CBK boss in reference to the poor disclosure levels on loans that are already in default. In Kenya, a loan that has not been serviced for 90 days is considered to be in default. Lenders have previously been lenient in classifying default loans as such, possibly because the borrowers are known to the banks- which then bend the reporting rules to accommodate such customers.
Several banks have reported lower profits, or even losses, owing to the tighter reporting requirements which are really ‘not new’ but had been ignored in the past. In the case of Imperial Bank and Chase Bank, both under receivership, directors of the two institutions were the biggest beneficiaries of the respective loan portfolios.
Assets acquired through proceeds of the loans extended by Chase Bank including an unidentified business park in Nairobi, have been seized and are now owned by the lender.
The Governor said it was up to the bank to decide what to do with the assets including outright disposal to recover the lost funds.
Njoroge was speaking a day after the Monetary Policy Committee, which he chairs, relaxed the financial stance by lowering the benchmark rate by 1 per cent. The MPC’s meeting held on Monday reported there was no danger of the economy overheating owing to the cut in the benchmark rate, also known as the Central Bank Rate, from 11.5 per cent to 10.5 per cent.
Through the easing policy stance, the CBK projects that the Kenyan economy will grow at a faster rate of 6 per cent –compared to the 5.6 per cent reported in 2015.
“We felt that there was room to increase the GDP production,” Njoroge said, citing that the key sectors of agriculture, tourism and a reduced balance of payments deficit were all in favour of faster growth.