The rate at which borrowers default on loans eased during the festive as the private sector looked for other sources of funding to escape high lending rates.
This is the first time the rate of bad loans has dropped since Covid-19.
The latest data from the Central Bank of Kenya shows the overall loan default rate dropped from 15.3 per cent to 14.8 per cent between October and January.
This means banks are likely to write off Sh750 billion in their possession, considering that bank deposits rose by Sh430 billion in the first six months of the year to exceed Sh5 trillion for the first time.
"Decreases in NPLs were noted in the energy and water, manufacturing, agriculture, building and construction and transport and communication sectors. Banks have continued to make adequate provisions for the NPLs,'' CBK said in a Monetary Committee brief.
Although the apex bank did not give clear reasons for the drop in bad loans, banking experts are of the view that the household wing of the private sector borrowing relied on savings for Christmas treats and school fees.
"While households relied on savings and gifts from friends and relatives to Christmas festivities, the break saw manufacturers and traders cut on credit which was activated towards the end of the year and early January,'' banking sector expert Ibraham Onalo told the Star.
This is why credit to the private sector grew to 13.9 per cent from 13.2 per cent in November.
The Christmas break was a blessing in disguise, especially for the manufacturing sector, which has since overtaken traders as the biggest defaulters of loans, reflecting the rising operation costs for the sector, which has been hit hardest by elevated inflation as well as new and higher taxes.
The sector's stock of non-performing loans (NPLs) jumped 59.2 percent to Sh133 billion.
On Tuesday, the Monetary Policy Committee (MPC) raised the base-lending rate by 50 basis points to 13 per cent, citing high inflation and forex volatilities.
"The high rate is likely to trigger a high default rate in the coming days or companies will be forced to minimize operating costs. It means job cuts or total closures,'' Onalo said.
It is therefore no wonder that strong credit growth was observed in manufacturing (20.9 percent), transport and communication (20.8 percent), trade (13.1 percent), and consumer durables (9.9 percent).
The number of loan applications and approvals remained resilient, reflecting sustained demand, particularly for working capital requirements.
Speaking to journalists at the Post MPC briefing, CBK governor Kamau Thugge said lending to the private sector could have been much stronger were it not for the high forex volatility witnessed during the period under review.
According to the CBK data, forex pressure cut lending to the private sector to 8.3 per cent during the review period compared to eight per cent in November.
Apart from forex, inflationary pressures hit hard the banking sector, with the overall inflation increasing to 6.9 per cent in January 2024 from 6.6 per cent in December 2023, and remained sticky in the upper bound of the Government’s target range.
Food inflation increased to 7.9 per cent in January 2024 from 7.7 per cent in December 2023, largely reflecting higher prices of a few non-vegetable items, following reduced supply partly attributed to seasonal factors.
Fuel inflation rose to 14.3 per cent in January 2024 from 13.7 per cent in December 2023, largely due to higher electricity tariffs.
Non-food non-fuel (NFNF) inflation increased to 3.6 percent in January 2024 from 3.4 percent in December 2023, partly reflecting seasonal increases in education sector-related costs.
"The risks to inflation remain elevated in the near term, reflecting the impact of second-round effects of the rise in fuel inflation, and pass-through effects of exchange rate depreciation,'' Thugge said.