ICEA Lion: Local banks are renewing their hunger for risk

Commercial banks are set to renew their hunger for risk in the New Year as they chase down a higher return from their core lending activities over the next 12 months.

Analysts at ICEA Lion Asset Management (ILAM) for instance foresee a return to aggressive lending by the banks as they put the effects of the COVID-19 pandemic to one side.

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Surprisingly, small and medium enterprises (SMEs) have been tipped as the greatest beneficiaries of new lending momentum in 2021 as they represent lower risks in contrast to premium large corporate clients.

According to ICEA, the rate of loan defaults by SMEs for instance averages in the single digits between 5 and 10 per cent against a mean 10-15 per cent rate of default by corporate clients.

“There are a lot of hungry bankers out there looking for opportunities in lending to the private sector. For the first time in five years, we expect a double digit private sector credit growth as banks renew their appetites,” stated ICEA Lion Head of Research Judd Murigi.

“We’ve seen a higher rate of non-performing loans (NPLs) by corporate clients as opposed to SME borrowers and we think this provides a key learning opportunity for banks to change their perception on risk attached to small businesses.”

Banks have in recent overlooked SMEs to favour richer clients including corporate and Government.

However, the tables are now turning as the corporate clients become riskier proponents while yields from lending to the government have plateaued on falling yields which now risk being overrun by depletion from inflation over time.

To fully turn the tide, Murigi argues banks must endeavour to shift their attitudes on SMEs to profit from the opportunities they offer to grow their respective returns from investments.

SME financing has remained in the shadows under complexities occasioned by the rate cap regime which ran between September 2016 and November 2019 as the State fixed maximum returns from commercial lending.

Most recently, the COVID-19 pandemic has severed credit access to SMEs with banks attaching a higher risk premium to borrowers over perceived debt default vulnerabilities occasioned by the global health crisis.

As the economy re-emerges from the initial pandemic hit that was followed by tough restrictions to curb the virus, banks are expected to trim their assessment of risks and in-turn open up the taps for new lending.

At present, private credit sector growth stands at 8.2 per cent according to the latest Central Bank of Kenya (CBK) monetary statistics covering 12 months to November 2020.

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