COVID-19 chokes interest rate repeal gains – Report


COVID-19 chokes interest rate repeal gains - Report

In Summary

  • While the rate repeal was expected to further lending to riskier borrowers such as micro, small and medium enterprises (MSMEs), a new banking sector report by the Fitch credit rating agency shows credit growth has remained muted.
  • Commercial banks have pulled back on SME and personal lending, dragging down loan growth as lenders favour investments in low-risk government securities.
  • LICs are nevertheless seen as the greatest risks to banks with the costs rising to 40 per cent of pre-impairment profits at the end of June 2020 in comparison to 17.5 per cent last year.

The COVID-19 pandemic has reversed benefits earned from the repeal of the interest rate caps in November last year.

While the rate repeal was expected to further lending to riskier borrowers such as micro, small and medium enterprises (MSMEs), a new banking sector report by the Fitch credit rating agency shows credit growth has remained muted.

The report which tracks spreads by banks following the collapse of the rate cap regime indicates banks have been unable to reprice existing loans while net interest margins have sharply declined.

Commercial banks have pulled back on SME and personal lending, dragging down loan growth as lenders favour investments in low-risk government securities.

Subsequently, the low rate of new loan issuance has caused an acceleration in asset quality deterioration.

The industry’s ratio of non-performing loans (NPLs) for instance surged to 13.6 per cent in August 2020 from a lower 12 per cent at end of 2019.

Besides the slowdown in new loans, the challenging economic conditions caused by the COVID-19 have been attributed to the mounting bad loans.

The weaker asset quality alongside rising loan-impairment charges (LICs) are expected to lead to shallow profitability for the banking sector in 2020.

The gross NPL ratio is for instance expected to hit 15 per cent by the end of December with lenders mostly exposed to personal loans marking the sharper contraction in asset quality.

LICs are nevertheless seen as the greatest risks to banks with the costs rising to 40 per cent of pre-impairment profits at the end of June 2020 in comparison to 17.5 per cent last year.

Fitch has recommended a stay on flexibility on loan classification and provisioning as currently directed by the Central Bank of Kenya (CBK).

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