Borrowers have hit banks with an additional Sh87.6 billion in loan defaults in the first six months of the year, pointing to a cash crunch that could set up thousands of debtors for property seizures.
The latest data from the Central Bank of Kenya (CBK) shows the stock of credit for which principal or interest has not been paid for at least 90 days rose for the sixth straight month to Sh514.4 billion at the end of June.
The rise of gross non-performing loans (NPLs) by 20.5 per cent - from Sh426.8 billion in December 2021 to the record Sh514.4 billion - presents a dark spot on banks' continued rise in profitability.
Banks usually respond to defaults by tightening lending, seizing and auctioning loan securities such as land and cars or private treaties which allow customers to sell their own assets and repay loans.
The increased stock of defaults sent the NPL ratio to 14.7 per cent in June - beating levels last seen in August 2007 when it stood at 14.4 per cent.
This comes at a time the freeze of blacklisting defaulters of Sh5 million and below granted by President Uhuru Kenyatta in October last year nears its end next month.
The rise in NPL ratio signals that the pace of loan repayments is lagging behind that of issuing new loans, even though CBK has maintained that this is from just a few large accounts.
Banks are now stepping up on recovery efforts such as auctions to bring down the rate of defaults in an environment of the rising cost of living, which is currently at levels last seen five years ago.
For the quarter that ended September 30, 2022, banks expect to intensify their credit recovery efforts in eight economic sectors, according to the CBK credit report for June.
The sectors include personal and household, trade, transport and communication, real estate and building and construction.
"The intensified recovery efforts are aimed at improving the overall quality of the asset portfolio," said the CBK.
Rising defaults have come when the industry's six-month pretax profit to June hit Sh119.7 billion - a 24.1 per cent increase from Sh96.4 billion posted in the preceding similar period.
Banks have in the half-year period increased their loan book by Sh244.1 billion, or 7.5 per cent, to close June at Sh3.492 trillion.
The rising defaults also come when banks are beginning to increase lending to the private sector, with the pace hitting 12.3 per cent in June.
The increase in gross loans was largely witnessed in the trade, manufacturing and personal and household sectors, according to the CBK.
"The increase in gross loans was mainly due to increased credit granted for working capital purposes, and loans granted to individual borrowers," said CBK in the June credit survey report.
But corporates have become the new thorn in the flesh of many banks, with cases of litigations to recover loans becoming common.
Top banks have had to resort to the courts to recover their money, with some debtors put under receivership.
The decline in the performance of firms such as Uchumi, Kenya Airways, East African Cables, East African Portland Cement, ARM Cement, TransCentury and Mumias Sugar was the first sign of struggle in corporate Kenya.
However, the list continues to bulge with new names outside the Nairobi Securities Exchange such as National Oil and Kaluworks Ltd struggling to pay loans, with some either seeking repayment extensions or ending up defaulting.