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Court victories boost KCB's bid to cut soaring bad loans

KCB reckons that it has made the first steps in a long and torturous journey of bringing down its non performing loans, or loans that have not been serviced for more than three months. [Elvis Ogina, Standard]

It may be too soon for the new KCB Group Chief Executive Paul Russo to pop the champagne.

But Mr Russo, the new occupant of the corner officer at Kencom Building, has every reason to smile over two recent developments in court.

Two recent back-to-back victories in the Court of Appeal have given some significant jolt to Mr Russo’s goal of bringing down the levels of bad loans on the lender’s books.

Last week, the Court of Appeal allowed KCB Kenya, which has the largest share of KCB Group’s non-performing loans (NPLs), to take control of the luxurious English Point Marina over a Sh5.2 billion debt that the latter has been unable to repay.

Towards the end of September, the Court of Appeal cleared Uganda-based Sarrai Group to resume operations at Mumias Sugar Company.

This is after the appellate court temporarily suspended an earlier High Court decision to bar the firm from running the troubled miller.

In a ruling, appellate judges Asike Makhandia, Jamila Mohammed and Sankale ole Kantai, said they were persuaded that Sarrai Group together with the KCB-appointed administrator PVR Rao had demonstrated that their appeal would be rendered useless if the decision cancelling the lease in April was not suspended.

And with these two breakthroughs, KCB reckons that it has made the first steps in a long and torturous journey of bringing down its NPLs, or loans that have not been serviced for more than three months.

At 21 per cent, KCB has one of the highest NPL ratios, which is the fraction of bad loans to a lender’s total loans, among the large banks.

This is above the industry ratio, which currently stands at around 15 per cent.   

In his first investor briefing, Mr Russo undertook to bring down that lender’s NPL ratio.

“This (the NPL ratio) is the highest it can be. I have worked through my projection. And I am very sure we will be within the 15 and 17 per cent range the next time we meet,” he said during the investor briefing in Nairobi in August.

KCB Group, the second-largest bank in the region by asset value, nonetheless continues to rake in good profits having recovered from the negative effects of the Covid-19 pandemic.

In the first six months of this year, KCB recorded a net profit of Sh19.6 billion on the back of increased interest income, non-funded income and a reduction in loan-loss provisions. 

This was a growth of 28.4 per cent compared to the Sh15.4 billion that the listed lender recorded in the first six months of 2021.

Nonetheless, this impressive performance was blighted by a jump in the NPL ratio. An excessively high NPL ratio, studies have shown, forces banks to limit their credit supply to borrowers.

But Mr Russo believes he is on top of things in as far as bringing down the NPL ratio is concerned.

In an exclusive interview with the Financial Standard in August, he said the NPL ratio at the time had already come down to below 21 per cent in the first half.

In our last interview, Mr Russo talked about how most of the NPLs were legacy, featuring old names such as the English Point Marina and Mumias Sugar.

One of the ways he wants to manage the bad loans is by taking the hand of the distressed borrowers and walking with them in accessing working capital.

But this is not the route KCB has taken with the English Point Marina and Mumias Sugar, although Mr Russo said he understands too well that putting a company up for sale might not necessarily be the best solution.  

It might be a client engaged in, for example, a truck business whose operations have been disrupted by the Standard Gauge Railway, he noted.

“It is not a bad client. It is only that the situation has changed.”

Such a customer needs money that is cheaper, said Mr Russo. And while KCB might not be in a position to get them the money, it can help them through KCB Capital, an investment arm of the bank. 

“It can either be that they take a stake or they can use instruments like letters of credit to help the client come out of the woods. Here is where execution comes in,” said Mr Russo. 

It is a different ball game for old debtors such as the English Point Marina, which KCB Kenya was forced to seize and put Pearl Beach Hotel Ltd, a real estate firm that owns the hotel, under statutory management.

The Court of Appeal through judges Hannah Okwengu, Hellen Omondi and John Mativo overturned an earlier High Court ruling that had stopped KCB–appointed receiver manager Kamal Anatroy Bhatt from taking control of Pearl Beach. 

“Having perused the application and the respective submissions filed by counsel for the respective parties, together with the authorities cited, and upon the respective learned counsel highlighting their submissions, we hereby give our decision granting the notice of motion dated July 22, 2022 and issue an order staying the ruling and orders of the honourable Lady Justice Dorah Chepkwony,” said the three judges. 

They also stopped any further proceedings in the High Court, pending the hearing and determination of KCB’s appeal. 

On June 7, Justice Chepkwony blocked KCB’s appointed receiver manager Kamal Anatroy Bhatt from taking over the real estate firm, pending the determination of the case filed by the real estate firm.

Pearl Beach Hotels had filed the suit seeking to challenge the appointment of a receiver by KCB Bank Kenya Limited.

Mumias Sugar owes KCB close to Sh3.5 billion, which the lender tried to recover by taking control of the miller and appointing a receiver manager.

However, the receivership has also been buffeted by numerous court cases, with the Ugandan company that won the contract to run the miller being delayed from starting operations.

Just as in the case of the English Point Marina, contractors have not only disputed the award of the contract to run Mumias to Sarrai Group but also reckon KCB’s appointment of Pongangipalli Rao as the receiver manager as irregular.