Eyes on new-loans growth as CBK stages rate meeting

The focus of the Central Bank of Kenya (CBK) is expected to be on the growth of loans to Kenyans when it hosts its policy setting meeting on Thursday.

Private sector credit growth is expected to take centre stage at the now monthly meetings as the CBK uses the metric to measure the pulse of the economy in the midst of the Covid-19 pandemic.

Analysts hold consensus on a possible hold to the benchmark Central Bank Rate (CBR) at seven percent with recent accommodative measures having achieved its intended target of supporting lending to Kenyans.

Private sector credit for instance rose to 8.6 percent in March and ultimately to 9 percent from 7.7 percent in February as the CBK instilled back to back cuts to the CBR and a record first cut to the cash-reserve ration (CRR) in nearly eight years to 4.25 percent.

Loan freeze

However, the experts now reckon an end to the policy translation as banks weigh rising customer risks in the middle of the pandemic to inform the turning off of the taps to new credit lines.

The growing risky customer profiles have further been exacerbated by deteriorating asset quality as the majority of banks now register higher non-performing loans (NPLs).

The percentage of gross NPLs to the industry’s total loan book hit 13.1 percent in April from a lower 12.3 percent in February despite mitigation measures that saw the restructure of over Ksh.270 billion in customer loans to mirror the inability of customers to meet loan repayments.

Researchers at Genghis Capital for instance observe a dry-up in new loans issued by commercial banks as the industry stocks up high liquidity levels.

The interbank rate for instance hit a 10-month low 2.6 percent earlier this month from 4.1 percent at the end of May supported in large part by government payments.

“Ordinarily, this should push lending appetite to risky segment of the creditor base- a self-evident reminder is that ordinary times is far removed from the current reality. This signals that credit lending has been muted and investors should read ‘base effect’ beyond the near-term private sector credit growth readings,” they noted.

Government borrowing

Treasury’s high appetite for borrowing local funds is seen as the second nemesis to the growth in loans to Kenyans.

As investors flee into safe havens such as government, private sector credit growth is seen halting to a stop as commercial banks continue to pack funds in the safety of the Treasury.

For instance, CBK’s last bond issue earlier in the month saw investor who include banks and pension funds pack funds in excess of Ksh.105.1 billion into the issue against a lesser target of Ksh.40 billion for the auction.

“Banks continue to invest heavily in government in response to further deterioration in asset quality. The huge fiscal deficit financing needs suggests that government appetite for domestic debt will remain high. The biggest losers remain a private sector starved off credit,” said Sterling Capital Head of Research Renaldo D’Souza.

Researchers at Cytonn expects government to continue eating into the private sector’s pie having raised its domestic borrowing target for the 2020/21 fiscal year to nearly Ksh.600 billion in gross terms.

“We remain negative on government borrowing following the recently read FY’2020/21 budget which has seen an increase in the domestic borrowing targets to Ksh.493.4 billion from Ksh.404.4 billion in FY’2019/20,” they noted.