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Rating agency warns banks of looming bad loans risk
Rapid lending growth risks plunging Kenyan banks into a pit of bad loans that the lenders are ill-prepared to absorb, international rating agency Moody’s has warned.
The situation is particularly worrying because the banks are not setting aside enough cash to shield themselves against a possible surge in bad loans, Moody’s said, echoing similar warnings by the International Monetary Fund (IMF) and the Treasury.
“We caution that specific provisioning levels are already low, at less than 40 per cent of non-performing loans (NPLs), and a slight increase in NPLs could quickly widen the provision gap and, with it, materially reduce net earnings further down the road,” Moody’s said in its latest report.
The agency expects the mountain of bad loans to grow in the next 12 to 18 months when it will start eating up the banks’ earnings that have also been growing robustly in the past three years.
These fears have led the IMF to suggest that the Central Bank of Kenya (CBK) should increase lending rates to check credit expansion.
“The IMF recommends that the CBK should remain vigilant and act as needed to head off any pressure from rapid credit growth and the envisaged scaling up of infrastructure spending (potentially by raising interest rates),” said the multi-lateral lender in a letter to the Treasury.
Last year, Kenyan banks expanded their loan book by 22.8 per cent to Sh1.97 trillion – the fastest growth in four years. During the same period non-performing loans grew by 30.6 per cent to Sh108 billion but still accounted for a paltry 5.4 per cent of the total loan book down from 5.8 per cent in 2013.
The IMF says that the coverage ratio, the amount set aside as provision for bad loans, as a ratio of total non-performing loans, has been declining and requires attention.
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