Banks to intensify debt recovery ahead of 2021/22 fiscal year

By Steve Umidha

Commercial banks are fortifying themselves for a potential tsunami of bad loans, which could hit credit flows and ultimately the economy, a new Central bank of Kenya survey reveals.

As a result, the CBK’s credit officer survey expects senior bankers and credit officers to embark on a tedious process of credit recovery efforts ahead of the 2021/22 fiscal year which kicks off in July 2021, exactly 54 days from today.

It also expects non-performing loans (NPLs) to hit a fresh high in five key economic sectors of personal and household, real estate, transport and communication, tourism, and trade which were worst affected by the global pandemic.

“For the quarter ending June 30, 2021, banks expect to intensify their credit recovery efforts in all economic sectors. The intensified recovery efforts are aimed at improving the overall quality of the asset portfolio,” said senior commercial bank managers and credit officers who took part in the survey published on March 31.

Recent aggressive reforms including the implementation of International Financial Reporting Standard (IFRS), have helped lenders get their bad assets and credit costs under control which the survey admitted to have had an adverse impact on commercial banks’ capital adequacy due to increased provisioning.

The survey – tabularized between January and March further indicates that 53 percent of local senior credit managers expect the level of NPLs to rise in the second quarter of 2021 as a result of the COVID-19 pandemic containment measures announced in March 2021.

“The increase in NPLs was mainly due to a challenging business environment as a result of COVID-19 pandemic…and as a result the eleven economic sectors will be affected negatively by the pandemic,” they said.

Going forward the survey also noted that commercial banks will deploy excess liquidity towards lending to the private sector, investing in Treasury Bills and Bonds, while at the same time enhance interbank lending, CBK liquidity management through repos and increased cash holdings – following reopening of the zoned counties by President Uhuru Kenyatta in his Labour Day address.

The five zoned regions of Nairobi and the counties of Kajiado, Machakos, Kiambu and Nakuru had in March treated as one zone, and residents barred from crossing over to other areas in an effort to curb the virus spread.

Surprisingly according to CBK findings, banks and small financial institutions haven’t faced accentuated liquidity risks since the pandemic first hit in March 2020 – which was initially assumed would happen due to a high proportion of borrowers opting for loan moratorium.

During the quarter ended March 31, 2020, liquidity in the banking sector increased from 54.6 percent in December 2020 to 56.3 percent in March 2021, while the ratio remained above the minimum statutory ratio of 20 percent.

During the quarter under review, the CBK study noted that the perceived demand for credit remained unchanged in seven economic sectors. It increased in three sectors and decreased in one sector.

“The main sectors with unchanged demand for credit are Mining and Quarrying, Agriculture and Energy and Water. Perceived demand for credit significantly decreased in the Real Estate sector due to subdued demand for housing units,” it said.

The CBK data shows that the aggregate balance sheet rose by 2.0 percent to Sh5, 528.44 billion in March 2021 from Sh5, 420.08 billion in December 2020.

On the other hand, gross loans increased by 1.4 percent from Sh2, 999.47 billion in December 2020 to Sh.3, 040.45 billion in March 2021 which was mainly attributed to increased advances in the Financial Services, and Energy and Water sectors.

During the quarter period, total deposits by banks increased by 2.8 percent from Sh4, 021.94 billion to Sh 4,133.15 billion.