Credit appetite slumps on expensive loans

New bank loans have taken a hit since May when it became clear that lending rates would soar to interrupt demand and drive away prospective borrowers. Growth in the aggregate private sector loans was slowest in August and September where commercial banks lent Sh31 billion and Sh35 billion respectively.

A monthly breakdown of credit expansion for the year shows the two months as the hardest-hit, down from a peak of Sh53 billion in April. Several prospective borrowers who had talked to the Standard had indicated that they had decided to shelve spending plans altogether or to a later date when lending rates are friendlier. "Loans have become too expensive that I do not think I will borrow now," Joseph Njoroge said, capturing the sentiments shared by thousands of other borrowers.

A relatively stable interest rate environment has encouraged borrowing, and with delivering outsized returns for lenders. A slowdown in the expansion of credit, while widely thought to be only temporary, could have a significant bearing on the full year profitability of banks. Apart from the lower uptake of new loans, banks are required to increase their provisions for defaults in volatile interest rate regimes, as is the case at present.

One of the larger banks has for instance doubled its provisions for non-performing loans in just three months to Sh1.5 billion. Until this year, nearly all commercial banks have reported sustained double-digit climb in profits, year on year. For the nine months to September, the sector reported a 9.3 per cent rise in pretax profits to Sh114 billion – a record level but on a slower earnings momentum. Industry profits in the June-September quarter were reported as Sh37 billion, much lower than the Sh39.6 billion in the preceding quarter, to paint a rough idea of the slowdown.

Comparison of subsequent quarters like this could however be erroneous due to seasonal trends in demand for credit. Lending rates across the market have risen steadily including the micro-loans granted by banks in partnership with mobile service providers, to big loans taken by corporations.

CBK reports that the average lending rates in September had edged up from 15.5 per cent in June to 16.4 per cent in October. Business loans were most expensive at 17.5 per cent on average, according to the industry data, which however does not fully capture all costs borne by borrowers. CBK governor Patrick Njoroge expects that commercial banks will slash their lending rates by taking cue from the falling rates on government borrowing.

"Banks know the dynamics so we expect that they should start notifying their customers about lower rates within this month," Dr Njoroge said. A new rate hike is effective among most commercial banks and has already been factored in the loan repayments coming up at the end of the month. It is not clear whether the lenders will heed the directive from the CBK to lower rates immediately.

The slowdown in credit uptake is a reflection of the shift in the money markets where returns from government borrowing grew steadily to attract big-money depositors like commercial banks. By end of last week, for instance, commercial banks held more than 55 per cent of all government debt, through Treasury Bills and Treasury Bonds.