Commercial bank loan restructures to cushion borrowers against the Covid-19 pandemic have increased to top Ksh.360 billion.

In his maiden budget statement to parliament on Thursday, Treasury Cabinet Secretary Ukur Yatani revealed the relief to customers had increased from Ksh.273.1 billion at the end of April to include relief on Ksh.190 billion of personal loans.

To protect borrowers against the effects of the pandemic, the Central Bank of Kenya (CBK) had directed banks, in March, to restructure payments on all loans to customers for a period of up to one year at own costs.

Total restructured at the end of April for instance represented 9.6 percent of the industry’s Ksh.2.8 trillion loan book.

Loan restructures under the Covid-19 pandemic has served as not only relief to borrowers but also to lenders as the process averts a potential acceleration in industry asset quality deceleration.

Further, the loan restructuring process have freed up new lending by banks flanked in part by the lowering of the commercial bank cash reserve ratio (CRR) to 4.25 percent from 5.25 percent at the end of March.

The lowering of the CRR freed up Ksh.35.2 billion in new liquidity to banks with the lenders already indicated to have utilized in excess of Ksh.29 billion of the funds as new lending to clients.

As such, private sector credit growth during the month of April defied the odds of the pandemic to soar to a high of nine percent with enterprises in manufacturing, trade, transportation, building and construction absorbing most of the new money.

Loan defaults

The loan restructures and accompanying higher private sector credit growth have however failed to impede asset quality deterioration as loan defaults picks up.

According to data from the CBK, the banking sector stock of gross non-performing loans rose to 13.1 percent in April from 12.5 percent in March or an equivalent Ksh.367 billion.

The ensuing Covid-19 pandemic which has brought forth widespread economic disruptions in the country is expected to drive up the loan defaults even further.

Banks own estimates made through research by the Kenya Bankers Association (KBA) for instance put loan defaults at 14 percent of total sector loans at the end of 2020.

Further research by Callstreet Research and Analytics however sees the stock of bad loans hitting 18 percent by the close of the year as economic output sinks into a weaker state.

CBK Governor Patrick Njoroge has however moved to alleviate fears of a fall out from higher industry non-performing loans as he expect the bad loans to correct in a near-term economic rebound.

“The issue of NPLs is not mechanical. This are highly exceptional times and it’s not the individual borrower credit risk that has change. If everything was as it were before, the credit rating would not have been altered,” he said.

“Banks shouldn’t been penalizing themselves for the risk and neither should they penalize borrowers.”

The higher credit risks come as banks allocate billions in the anticipation of future loan losses in line with the IFRS 9 accounting standards.

The additional provisions are expected to eat into lender’s earnings this year with Equity Group for instance already reporting a 14.5 percent earnings slide in three months through to March 2020.

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