Banks slide into Covid-19 loan default crisis

Loan defaults have hit banks hard over the last one year with lenders staring hundreds of billion lost in principal and interest.

Last year the Central bank of Kenya (CBK) allowed lenders to extend loan repayment for a year to help households and businesses cope with reduced revenues during the Covid-19 pandemic.

CBK ended the one-year window through which the lenders had given moratoriums on principals and interest and renegotiated terms including maturities, interest rates and fees and a tiny portion of interest rate freeze.

Read also: EABL Sh6bn early bond repayment dips NSE’s debt market to lowest level

Bank’s March financial reports marking exactly one year since the pandemic hit the country reveals a troubling picture of exponential growth in trouble loans that is likely to eat into their profits.

KCB saw the largest piling up of dud loans which soared by Sh31 billion followed by Cooperative Bank which rose by Sh20.1 billion and Equity Bank which increased by Sh18.8 billion.

LenderBad loans (Kes Bn) 2020Bad loans (Kes Bn) 2021
Source: Company filings

Only Absa saw a reduction in bad debts, indicating resilient customers and robust credit risk profiling that helped them avoid the land mines.

The problem of defaults is likely to haunt the banking sector for a long time to come.

Banks realize that the customer they have restructured will take time to get into full production even if they resume businesses while households are squeezed for cash with the lifting of tax relief from the government.

Read also: KCB shakes off pandemic hit to post Sh6.4bn first quarter profit

Despite the optimism of resumption of economic activity owing to arrival of vaccines, the economy is still under threat of repeat waves of infection and discovery of new strains of the virus.

Move by the government to tighten restrictions again has sent businesses on a tailspin again especially given all the measures to mitigate adverse impact on households and businesses have been withdrawn.

Lenders foresee a prolonged recovery where some businesses will rebound, some may never recover even as new ones come up to replace them.

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