Auction fears as bank borrowers default Sh39bn in three months

The golden scales with the northern dollar. [Getty Images]

The share of loan defaults has increased to Sh539.3 billion, pointing to a cash crunch in the economy that could set up thousands of borrowers for property seizures.

The latest Central Bank of Kenya (CBK) latest data shows that 14 per cent of all loans were defaulted by the end of March this year, a sharp increase from 13.3 per cent or Sh500 billion in December 2022.

The CBK says the defaulted loans are mainly in the building and construction, manufacturing, trade as well as transport and communication sectors 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.

"The asset quality, measured by gross non-performing loans to gross loans ratio deteriorated from 13.3 per cent in December 2022, to 14.0 per cent in March 2023," says CBK.

"This was due to a 10.9 per cent increase in gross NPLs compared to a 4.8 per cent increase in gross loans."

The share of bad loans rose as gross loans increased by 4.8 per cent from Sh3.6773 trillion in December 2022, to Sh3.8523 trillion in March 2023.

"The increase in gross loans was largely witnessed in the financial services, transport and communication, and manufacturing sectors," said CBK.

"The increase in gross loans was mainly due to increased credit granted for working capital purposes, and loans granted to individual borrowers."

CBK says it expects banks that had gone slow on property seizures could now be forced to step up debt recovery efforts to clean up their loan books, which could lead to a spike in auctions.

"For the quarter ended June 30, 2023, banks expect to intensify their credit recovery efforts in eight economic sectors and retain them in three sectors (mining and quarrying, energy and water, and financial services)," said CBK.

"The intensified recovery efforts are aimed at improving the overall quality of the asset portfolio."

The data shows that businesses that tapped loans based on their projected cash flows are also struggling to meet their loan obligations.

The manufacturing and building sectors are currently grappling with escalating costs of raw materials and weak demand as rising prices of final products hit consumers' spending power.

The real estate sector is also a victim of the loss of income among households and businesses as a result of the lingering economic effects of the Covid 19 pandemic, with owners of land and developed properties taking longer to sell their assets or faced with lower asking prices.

Kenya's economy experienced a slower growth rate of 4.8 per cent in 2022 compared to 7.6 per cent the previous year, according to official statistics.

The Kenya National Bureau of Statistics (KNBS) 2023 Economic Survey attributed the sluggish growth of the economy to several factors, chief among them the Covid-19 pandemic and a prolonged drought that impacted most parts of the country.