Loan Moratoriums to Hit Banks' Earnings

The Central Bank of Kenya (CBK) advise for banks to renegotiate loan repayment terns with distressed borrowers continues to elicit mixed reactions among policy makers, bankers and financial experts.

” The biggest asset on a bank’s balance sheet is its loan book. If you give moratoriums on that book, you are hitting your largest revenue item on the profit and loss account,” said Reginald Kadzutu, Head of Retail, Zamara.

He told The Kenyan Wallstreet that with more people using mobile money and banks not charging fees for transfers from bank account to mobile wallet, a drop in non-funded income item will affect revenues of banks.

” My worry is that in the next six months, factors that caused small businesses, corporates and individuals to seek for loan repayment moratoriums will not have gone away. So expect non performing loans for banks to increase when the moratoriums end,” said Kadzutu.

During this month’s post-Monetary Policy Committee meeting media briefing, Central Bank of Kenya (CBK) Governor Dr. Patrick Njoroge encouraged distressed firms and individuals to seek fresh repayment deals with banks.

CBK figures indicate that commercial banks have restructured personal loans estimated at KSh 199 Billion or 25% of a personal loans porfolio worth KSh 795.2 Billion.

In total, loans worth KSh 679.6 Billion disbursed by commercial banks, out of the banking industry’s loan book worth KSh 2.9 trillion, have been restructured. This is 23.4% or a quarter of the banking industry’s total loan book.

Dr Njoroge also disclosed that following a reduction in the Cash Reserve Ratio(CSR) to 4.25% from 5.25%, some KSh 35.2 Billion has been availed to banks to directly support borrowers that are distressed as a result of COVID-19.

A survey by Kenya Bankers Association(KBA) titled Spillovers and Feedback Loops: The Banking Industry’s Response Scenarios to the Effects of COVID-19 Pandemic outlines that 65% of banks expect non-performing loans (NPLs) to increase to 14 percent from the current level of 12.4 percent.

While the CBK has maintained the Central Bank Rate(CBR) at 7% for the past two months, opinion is still divided on whether or not this monetary policy stance is being transmitted through the economy.

” This tool has largely been ignored by banks when pricing loans. It also has little effect on the interbank market and does not affect liquidity levels in the money market,” said Kadzutu.

Experts argue that when a Central Bank operates a target exchange rate and the monetary authority intervenes to keep it range-bound, then the monetary policy becomes ineffective.

In a policy brief titled: Borrower Relief Measures in ECA region the World Bank advises that it is important that the exceptional and temporary nature of borrower relief measures is broadly understood, and that policymakers promptly define exit strategies.

It is also critical that measures are undertaken in a transparent manner. Banks should provide banking supervisors with reliable, frequent, up-to-date, and comparable information regarding loans that have benefitted from borrower relief measures.

Additionally, banks’ financial statements need to provide investors and shareholders with sufficient information to understand the quality of the loan portfolio and credit risk control practices.

World Bank says that under the current extraordinary circumstances, temporary borrower relief measures are needed to preserve economic activity.

But it is critical that their design is carefully thought through to protect the public interest in safe and sound banking systems, and financial stability at large, especially given the inherent uncertainty of the COVID-19 crisis.

Kenyan Banks Restructure Personal Loans Worth KSh 102.5 Billion – Central Bank