Bad Loans Set to Rise Despite ‘Improving Outlook’

GeoPoll’s COVID-19 Tracker Report: The Ongoing Impacts of COVID-19 in 6 African Nations

Kenya’s new containment measures and other restrictions due to the third wave of Covid-19 infections, market analysts see bad loans rising.

“Businesses and households might once again struggle to service their loans and as such, most loans might be categorized in stage 3,” says Cytonn Investments.

Stage 3 loan classification means that the loan’s credit risk has increased to the point where the loan is considered credit impaired or in default. 

“The business disruptions that could result from the lockdown measures announced coupled with resultant supply chain disruptions will also lead to increased cost of risk for the banking sector,” they add in relation to the negative effects of the lockdown imposed on the five counties – Machakos, Kajiado, Kiambu, Nakuru and Nairobi City.

In addition, the end of the emergency measures on the restructuring of loans for bank borrowers was put in place in March 2020.

NCBA Market Research on the other hand says the decree could have several implications for credit markets.

“On one hand, regularizing of accounts could boost cash flows and liquidity, allowing for increased investments in government securities. On the other hand, improved portfolio performance could give banks more confidence to lend, increasing competition for liquidity. In the worst case, the inability to regularize the accounts and subsequent pressure on banks to write off some of these facilities could worsen risk aversion.” 

The Central Bank of Kenya (CBK) said the emergency measures were meant to cushion the borrowers from the adverse effects of the pandemic which would affect their ability to service loans such as the reduction in disposable income.

The CBK disclosed that following the resumption of repayments and some pay-offs, the outstanding restructured loans as at the end of February amounted to Ksh.569.3 billion, or 19 per cent of the total gross loans, a sign that the economy is on a recovery path.

However, the disruptive effects of the lockdown will have a devastating effect on poor and vulnerable citizens who are beginning to pick up the pieces of their social and economic lives after losing their livelihoods as a result of restrictions imposed for the better part of 2020.

“If indeed the government relied on the advice of public health experts to impose the latest lockdown and seemed to have an idea when the curve is likely to flatten in mid-May as the President announced, then it is equally duty-bound to be more definite and make the lockdown time-bound to avoid abuse of power,” said the Civil Society Reference Group (CSRG) on Sunday.

In November, the World Bank said an estimated 2 million Kenyans had been pushed into poverty due to sharp decreases in incomes and employment following the coronavirus-induced lockdown.

Consequently, in January, the Government ended the tax reliefs which took effect in April 2020. During the period, the income tax rate, Pay-As-You-Earn, was retained at 25 per cent.