High bank rates punctuated by the high cost of living on weak shilling and high fuel prices could see banks spend close to Sh1 trillion to cover for expected high loan default.
Industry players are worried that this is likely to slash end-of-year profits, dimming growth experienced post-Covid.
On Tuesday, the Central Bank of Kenya raised the base lending rate to 12.5 per cent after retaining it at 10.5 per cent for three months, effectively pushing lending rates to a high of 26 per cent for those with blurry borrowing histories.
"The cost of living is rising while disposable income is shrinking at an alarming rate. Borrowers are torn between buying food and repaying debts. The recent jumbo rate hike has just worsened the situation,'' investment banker Pamela Simani told the Star.
She adds that the situation is likely to lead to job cuts as small business players struggle to obtain credit to expand businesses
Her counterpart James Njagah says that the high lending rates are likely to see banks lend cautiously, especially to the private sector, with most targetting government papers which are promising higher yields and security.
"What happens when the government is buying bonds close to 20 percent yet a typical household borrower is offering an average of 18 per cent? This is not good at all,'' Kimani said.
He insists that although the shilling has been dropping against major international currencies, a 200 basis points hike was unnecessary.
According to CBK, the ratio of gross non-performing loans (NPLs) to gross loans stood at 15.3 per cent in October 2023 compared to 15 per cent in August 2023.
Increases in NPLs were noted in the manufacturing, trade, personal and household, building and construction, and transport and communication sectors.
Banks have continued to make adequate provisions for the NPLs. Growth in private sector credit remained relatively stable at 12.5 per cent in October up from 12.2 per cent in September.
Strong credit growth was observed in the following sectors: manufacturing (18.4 per cent), transport and communication (16.2 percent), trade (9.9 per cent), and consumer durables (10.8 percent).
Even so, the number of loan applications and approvals remained strong, reflecting sustained demand, particularly for working capital requirements.
The mounting defaults have prompted top banks such as Equity, KCB, Co-operative Bank of Kenya, Stanbic Bank, and I&M Bank to set aside more money for loan loss provisioning despite the sector’s pre-tax profits rising by 13.6 per cent to Sh65.1 billion.
Despite this, CBK says the banking sector remains stable and resilient, with strong liquidity and capital adequacy ratios.
The last time the country witnessed this kind of loan default was in 2005 when it hit almost 30 percent.
Some banks have already informed customers of the plans to raise lending prices following the new benchmark rate.
"Dear customer, we hereby inform you of the decision to raise the borrowing rate by two per cent starting this month,'' Absa Bank informed customers in text messages.
Others that have since effected the new loan pricing rate include Stanbic Bank, Equity and NCBA.
A senior manager at Equity Bank Group who is not allowed to comment on behalf of the lender told the Star in confidence that banks have enhanced scrutiny on borrowers to ensure they don't burn fingers.
"Banks are riding on artificial intelligence to conduct thorough analyses on borrowers in the wake of high nonperforming loans. While investment in state papers looks promising, lenders are also hesitant,'' he said.
Last month, his boss James Mwangi told investors that Equity Bank spared customers more than profits after the Kenyan unit reported a drop in profit for the first time in seven years.
"We decided to choose the customer over profit,'' Mwangi told investors.