An official industry report indicated that the profits of commercial banks went up by about 20 per cent last year at the cost of the quality of loans.
The lower quality of assets signified implicit risks in the future as banks could be constrained to provide for loan loss in their profit-and-loss accounts and lower shareholder payouts. It also showed distress by borrowers as banks hiked lending rates to make a record profit, and which was expected to go up due to political uncertainty this year,
Pre-tax profits registered KSh. 107.7 billion in 2012 as compared to KSh. 89.6 billion in the previous year due to the assertive marketing attitude adopted by the sector in the second half of the year following a low-loan intake during the first half of the year.
Newly published Central Bank of Kenya Credit Officers Survey Jan-Dec 2012 report showed that gross non-performing loans (NPLs) increased by 13.33 per cent to KSh. 61.6 billion last year, indicating that institutions may have lent to less creditworthy borrowers during the period of high interest.
The CBK report said that most of the banks expected the levels of non-performing loans to go up for the first quarter of 2013 due to the anticipated rise of political risk on account of the March 2013 elections.
One fact that was not directly mentioned in the report was that the country’s economic activities almost came to a standstill in the week following the March 4 General Election during the tallying of votes.
Lending rates went up strikingly from the last quarter of 2011 dissuading many potential creditworthy borrowers from taking loans. Banks were obviously left with quite a number of customers who were interested in taking loans but without any definite repayment plans, leaving the sector with lower quality portfolios, a condition that could be technically described as adverse selection.
As per the Credit Officer Survey, demand for credit rose up in 9 of the 11 sectors, but the demand from the mining, quarrying, and trade sectors remained unchanged during the year. The second half of 2012 saw a considerable increase in the borrowing which was due to the lower lending rates.
In 2012, banks eased credit standards for agriculture, manufacturing, and trade sectors while they remained unaltered in all other sectors.
The report said that there was a general optimism in the economy due to the fall in interest rates in the second half of 2012, resulting in increased supply of international finance to manufacturing, energy, and trade sectors.
Credit officers stated that due to the rise in NPLs they would step up debt collection efforts in the first quarter of this year as a pro-active step to restrain any type of negative outcomes caused by the March 2013 elections and also recover any non-performing loans as a result of the period of high interest rates recently felt by the sector.
Market players were of the opinion that NPLs were created due to high interest rates and depended on the banks as the interest rates differed from bank to bank.
Diamond Trust Bank finance and planning director, Alkarim Jiwa, opined that though non-performing loans were specific to individual banks, higher interest rates had eroded the ability of many borrowers to service the loans, leading to deterioration in the performance of loans.
The report also said that in the fourth quarter of 2012, there was a feeling that the NPLs would see an increase in the trade, tourism and communications, and real estate sectors in the first quarter of 2013 as a result of increased political risk.
When interest rates came down, the demand for loans from the manufacturing sector grew to 51 per cent in the quarter-ended December which had gone up from the previous quarter.
The report stated that banks had tightened credit standards by the end of the year as they understood the necessity to sustain their capital positions to comply with the the enhanced capital adequacy requirements.