How big bad borrowers like Kenya Airways continue to bleed lenders

Asset financing bank NIC Bank lent Kenya Airways an additional Sh1.6 billion to increase its exposure to the struggling airline.

NIC Bank boss John Gachora said the additional lending was part of a combined effort to lend the airline Sh17.65 billion ($175 million) to rescue it last year.

“The money was not all in cash there were guarantees and facility support,” Mr. Gachora said.

When the airline was headed for a crash NIC had given Kenya Airways Sh2.6 billion loan which they were forced to convert to equity along with other local banks.

This non-performing loan now has to be booked in the balance sheet and assessed in terms of its net present value each year to record a gain or a loss.

The lender whose Non-Performing loans grew from Sh13.5 billion to Sh14.3 billion says the bad loans led to reduced interest income.

NIC has reported a 4.2 percent drop in net profits from Sh4.3 billion in 2016 to Sh4.1 billion by the end of last year.

The bank blamed the rate cap and depressed yields from non-performing loans for the reduction in interest income which was down to Sh18.4 billion from Sh19 billion in 2016.

This is despite the fact that loan grew from Sh114 billion to Sh119 billion during the period under review.

“The reduction in yield on loans and advances was as a result of non-performing loans because when you default you do not pay,” NIC Bank boss John Gachora said.

The bank was, however, the beneficiary of a Sh26 billion growth in deposits from the deal to manage Imperial bank, new accounts, and clients from rival banks.

“The contribution of Imperial Bank was less last year but in 2016 we got up to Sh10 billion,” Mr. Gachora said.