Banks, saccos warn of massive loan defaults

Central Bank of Kenya (CBK) Governor Patrick Ngugi Njoroge during a past presser in Nairobi. [File, Standard]

Financial institutions including commercial banks, microfinance institutions and Savings and Credit Co-operative Societies (Saccos) have raised jitters over the inability of tens of thousands of civil servants to meet their loan obligations due to delayed salaries.

The government has delayed paying March salaries for most of its public sector workers due to a major financial crisis. Civil servants and unions have now threatened to down their tools from tomorrow as they report back from the Easter holidays.

And on Sunday, financial institutions raised fears over the grave implications of salary delays.

They warned the hitch could develop into a dangerous debt crisis and subsequently snowball into a full-blown national financial crisis if not arrested soon.

The financial institutions fear thousands of public sector workers - both at the national and county governments could default on their monthly loan obligations, having already missed initial deadlines for payment leading to a risk of an increase in bad loans for lenders with outstanding loans.

Asset quality

The lenders fear payment of the loans due could be complicated by the salary crunch further compounding the mountain of bad debt held by the financiers and affecting their asset quality.

This came as State House's top economic adviser David Ndii on Saturday hinted that the government is facing an acute cash crunch amid the unprecedented salary delays for civil servants at both the national and county levels.

To demonstrate the magnitude of the crisis, Dr Ndii revealed that President William Ruto's administration avoided a default on its sovereign debt obligations without divulging additional details on the economic risk.

A default is a failure by a country's government to pay its debt and has grave financial implications for the economy.

In interviews with The Standard on Sunday, civil servants who have maintained good credit records over time with their lenders and Saccos said they fear their credit histories will be tarnished - affecting their ability to borrow in future.

They said they also fear any potential defaults could set them up for sanctions and more pain of higher interest and property seizures from aggressive lending institutions.

State House adviser David Ndii David Ndii during a past meeting. [Esther Jeruto, Standard]

"We are trying to engage the banks and Saccos and plead with them to understand this situation is not of our own making," said Nairobi-based teacher John Ochieng.

"My bank has already rolled over my repayment and slapped me with higher interest so it will be very tough even when I eventually get my pay," added a government official who only identified himself as Maina.

Check-off personal loans to key institutional employees including teachers, security agencies and other State corporations who borrow against the strength of their pay slips and are perceived to be less risky have been popular with banks and Saccos.

Civil servants also have access to personal loans, auto loans, mortgages and other types of financial products. Loan defaults increased for the fifth consecutive month to hit a record Sh496.6 billion in January 2023, amid a stressed economy that has made it harder for individuals and businesses to service their loans.

Data from the Central Bank of Kenya (CBK) show that non-performing loans have been on the rise since December last year when they stood at Sh487.7 billion.

Banks have been facing ever-rising loan defaults, after the onset of Covid-19 in March 2020, which affected millions of households as their incomes dropped and businesses ground to a halt.

The latest CBK data shows that 14 per cent of all loans were defaulted by end of February, the sharpest 12-month increase over a year. The stock of bad loans had risen to Sh496.6 billion in January this year out of total loans of Sh3.708 trillion in the same period.

The share of loan defaults had dropped to 13.3 per cent in December but has since been rising.

Treasury CS Njuguna Ndung'u when he appeared before the Senate on April 5, 2023. [Elvis Ogina, Standard]

The mounting defaults are a reflection of the struggles that Kenyans are undergoing in an economy that has witnessed a string of job losses in recent months across nearly all sectors as corporates intensify austerity measures to protect profits.

New loans

CBK said recently the defaulted loans are mainly in the building and construction, manufacturing, and trade signalling that firms and individuals who had taken new loans on the strength of increasing cash flow with the reopening of the economy are struggling to service their loans.

"Increases in NPLs were noted in the trade, personal and household, manufacturing and building and construction sectors. Banks have continued to make adequate provisions for the NPLs," said CBK Governor Patrick Njoroge.

Banks have stepped up debt recovery efforts to clean up their loan books, leading to a spike in property seizures by aggressive lenders.

Households and businesses are reeling from the effects of high inflation, which has lowered demand for goods and services.

Kenyans are having to dig deeper into their pockets to purchase basic commodities as inflation edges up on high food and fuel prices. Data by the Kenya National Bureau of Statistics indicate that March inflation remained at 9.2 per cent, the same as in the previous month.

A severe drought earlier this year, biting inflation, job losses, a bank lending slowdown and prolonged political uncertainty are creating a growing pool of distressed borrowers whose assets are being seized by aggressive lenders.