Alarm as real estate loan defaults rise to Sh61 billion

Central Bank of Kenya, Nairobi. [Jonah Onyango, Standard]

Defaults on loans advanced to the real estate sector increased by more than Sh5 billion in the last quarter of 2020, as the pandemic continues to ravage the economy.

According to data from the Central Bank of Kenya (CBK), the sector recorded a 6.4 per cent increase in the gross non-performing loans (NPLs) from September to December 2020 to Sh61.4 billion, up from Sh57.7 billion in quarter three of 2020.

The increase in the non-performing loans has been attributed to layoffs, business closures affecting the commercial office and retail sectors, and travel restrictions triggered by the pandemic.

These affected the performance of the hospitality industry as well.

With the pandemic continuing to ravage the economy, the country’s credit risk was higher in the last quarter of 2020 due to the economic meltdown and uncertainty occasioned by the Covid-19.

“Credit risk remained elevated with gross non-performing loans to gross loans ratio standing at 14.1 per cent in the fourth quarter of 2020, up from 13.6 per cent in the third quarter of 2020,” read the report.

The report comes a few days after CBK said banks are expected to raise their provisions to keep up with the ongoing difficulties, with customers’ default rising to Sh432 billion worth of loans across the entire industry as of February.

“The ratio of non-performing loans to gross loans stood at 14.5 per cent in February compared to 14.1 per cent in December. NPL increases were noted in the real estate, agriculture, personal and household, and manufacturing sectors,” CBK said in a statement.

“The increases in NPLs were attributable to the subdued business environment, and banks continue to make provisions for the NPLs.”

From January 1, 2018, banks were required to make provisions for expected loan losses rather than those already incurred following the adoption of the more conservative International Financial Reporting Standards (IFRS 9).

Commercial units

Interestingly, the CBK quarterly report indicated that loans acquired through title deeds posted the fastest-growing default rates.

This was attributed to the low demand for residential units especially in the high-end areas and commercial units which caused a slump in the sector.

The gross non-performing loans in the real estate sector account for 14 per cent of the total real estate loan book which is valued at Sh439 billion.

With regards to the loans by sector, real estate accounts for 14.6 per cent of the total banking sector lending which is estimated to be Sh3 trillion. The report also shows that show that the economy was on a recovery path in the fourth quarter as the restrictions imposed to curb the spread of the pandemic were gradually eased in August.

The country’s broad money supply increased from September to December 2020 by 3.8 per cent, reflecting growth in deposits.

The total banking sector’s lending also increased by 1.9 per cent to Sh2.99 trillion in the fourth quarter of 2020 from Sh2.94 trillion in the third quarter of 2020.

The increase in gross loans and advances was mainly in the personal and household, manufacturing, and energy and water sectors.

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

The regulator said the banking sector is expected to remain stable despite the operational risk.

It noted that the sector remains elevated due to the continued increase of the Covid-19 infections in the country with the credit risk expected to remain higher in the short-term and medium-term.