Banks extend loan payment period as deductions mount
Banks are extending loan maturity periods for customers squeezed by increased State deductions such as the housing levy and pension to stave off the risk of mass default on the back of rising interest rates.
The rise in statutory deductions and increased interest rates in line with higher Central Bank Rate (CBR) — now at 10.5 percent, the highest point in nearly seven years—has hit borrowers with higher monthly deductions, putting many at the risk of defaulting on loans.
The Kenya Bankers Association director of research and policy Samuel Tiriongo said Wednesday that lenders are however supporting such distressed customers by increasing the repayment period to lower monthly deductions towards servicing the loans.
“Banks have been keen not to increase interest rates immediately following the CBR rise but to adjust loan tenors so that the repayment schedule remains the same,” said Dr Tiriongo during the release of the banking sector report covering 2022.
“With elevated repayment in terms of ticket sizes of repayment, that is actually an extra burden on the customer. But with an elongated period in terms of loan tenors, that supports customers.”
The move mirrors what was witnessed at the height of Covid-19 era disruptions where banks were granting customers loan servicing breaks and varied servicing periods to accommodate struggling firms and individuals.
Extension of the loan tenures means that borrowers who were servicing bank loans before the recent rate increments will continue paying about the same on monthly instalments, but take longer to clear the debt.
This also offers banks a fresh line of defence against the risk of default that works in favour of borrowers even though it comes with a higher cumulative interest repayment amount.
Salaried workers who had tapped loans on the strength of their payslips will this month have to put up with a three percent deduction on their gross pay towards the 1.5 percent housing levy that has been backdated to July.
Also read: Kenya Power gets Sh25bn loans repayment reprieve
Workers such as teachers and police officers also have the National Social Security Fund (NSSF) to deal with. This deduction, going up to Sh1,080, was introduced last month.
Deductions such as the housing levy, NSSF and National Health Insurance Fund—which the government is proposing to increase from between Sh150 and Sh1,700 to 2.75 percent of gross earnings—have been cutting the amount available to tap and service loans.
This, is in an environment where commercial banks have raised their base lending rates for the seventh straight month to close June at 13.31 percent, pointing to expensive credit for borrowers in the wake of the CBR increase and rising yields on government paper.
The average lending rate has continued the upward trend that started in December when rates jumped to 12.67 percent from 12.36 percent.
The latest average base lending rate for the sector is the highest since March 2018 when the figure was at 13.49 percent.
The rise in the cost of servicing loans driven by the rise in CBR and the switch to risk-based pricing regime, added to a persistently high cost of living, has served to complicate the situation further.
The banking sector loan book stood at Sh3.963 trillion in May, with most of it going to personal and households.
However, NPLs have risen for five consecutive months to close May at Sh592.6 billion to put a blot on the Sh99.6 billion pre-tax profit achieved during the period.
The NPL ratio—the ratio of loans for which no interest or principal has been received for at least three months—hit 14.9 percent in May, being a 16-year high, before easing to 14.5 percent in June.
KBA is forecasting slowed growth in the loan book going forward on the challenging economic times among borrowers.
Read: Kenyans default on Sh83bn bank loans in 4 months
“We anticipate that with the tightening of the monetary policy conditions, we will see a constrained supply of credit and that will be through liquidity rationing or an interest rate going up to an extent that it limits demand. With CBR going up, credit to the private sector will decline,” said Dr Tiriongo.
CBK credit survey for June on 39 banks showed 42 percent of the respondents indicated that NPLs are likely to rise in the third quarter while another 24 percent see the levels remaining constant.
Some 34 percent expect a fall. Personal and household, trade and transport and communication top the list of sectors where many of the banks expect NPLs to spike.
Banks including KCB, Equity and Stanbic have been increasing the provisioning for loan defaults. BY BUSINESS DAILY
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