Higher Treasury debt target lowers chance of cheaper loans

Loans in kenyaAn investment bank has predicted that lending rates could be high this year as the government competes with the private sector to finance operations.

Standard Investment Bank (SIB) analysts, through a report released on Thursday, warned that banks risked a build up of loans as the high interest rates hit borrowers.

Francis Mwangi, an analyst at SIB, said that looking at the economic front they don’t anticipate T-bills rates dropping. They had actually seen the rates start going up after touching eight per cent and so lending rates would remain high.

Treasury bill rates are considered to be an indicator of interest rate movements in the economy and are used as a reference point by banks and other lenders.

Consumption of loans were expected to slow down due to high interest rates, with the SIB reckoning that the industrial advances will grow by 18.2 per cent as compared to 32.2 per cent in 2011.

The growth of advances was expected to be driven by regional subsidiaries whose respective countries such as South Sudan and Tanzania were bringing out laws supporting the use of collateral for lending.

Though the Central Bank had been asking banks to reduce their interest rates, they had been slow mainly because of indications of increased government borrowing which normally raised rates.

In a research note released on Wednesday, Stratlink Africa indicated that prolonged and increased spending pressure on the government would increase the government borrowings and could negatively affect the private sector’s ability to access credit considering the fact that commercial banks were the largest consumers of government securities in the country.

The Treasury had already raised its domestic borrowing target by KSh. 31.6 billion to KSh. 137.2 billion from the earlier KSh.105.6 billion.

The rates went up to 8.16 per cent from 8.03 per cent in last week’s auction of government securities. The rate at which banks lent to each other also went up to 6.66 per cent, reflecting reduced monetary supply in the financial system.

The SIB report estimated that between 25 and 30 per cent of sector loan book was unsecured, most of which were payroll deduction to individuals. It was this portion of the loans that faced the greatest risk from higher lending rates, volatility in inflation, and stagnant wages. They have predicted average sector NPL ratio of 3.8 per cent and 3.6 per cent respectively for FY 2013 and FY 2014.

With the high interest rates banks were expected to continue enjoying wide net interest revenues that were a key driver of profits last year and banks were expected to surpass the KSh. 100 billion pre-tax profit mark. This had advised the investment bank’s positive review of banks’ listed stocks, barring Barclays, which had not been aggressive in growth as its contemporaries. SIB said that the bank had the opportunity to grow as it enjoyed high liquidity.

Image courtesy: FreeDigitalPhotos.net

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