Asset seizures by banks to rise on bad loans growth

Central Bank of Kenya

The Central Bank of Kenya building in Nairobi. 

Photo credit: File | Nation Media Group

What you need to know:

  • The rising cost of living is putting pressure on business and household budgets even as banks plan to step up asset seizures as part of a strategy to recover overdue loans.

Banks plan to step up asset seizures as part of a strategy to recover overdue loans, the Parliamentary Budget Office (PBO) has said, pointing to more pain for distressed borrowers.

The office disclosed that lenders have indicated ‘intentions’ of attaching borrowers’ collaterals as part of an intensified credit recovery plan.

“Further, non-performing loans are spread across all sectors of the economy, and banks have indicated their intent to intensify their credit recovery efforts, which may result in borrowers losing their collaterals in the process,” the report says.

This means that in the case of a secured loan such as a home or car loan, the bank can take over the asset that is used as collateral to secure the loan.

An unsecured loan, on the other hand, is without any security or mortgage as a guarantee for repayment and is solely based on borrowers’ credit rating, hence, assets cannot be taken.

Data by the Central Bank of Kenya (CBK) shows that the banking sector’s gross non-performing loans (NPLs) rose by 25.67 percent to Sh635.8 billion in November 2023 from Sh505.9 billion in the same period the previous year (2022)

The ratio of NPLs to gross loans increased by 150 basis points to 15.3 per cent from 13.8 per cent in the same period.

The PBO attributed the increase in NPLs in the banking industry to the high cost of borrowing as a result of the central bank increasing its policy rate, and the weak business environment.

It said fall of the Kenya shilling, high cost of fuel and other inputs, pending bills, and new tax measures have reduced household disposable income and purchasing power making it difficult for them to repay their bank loans.

The Kenya Bankers Association in a research note dated January 2024 called for a halt to further rate hikes to help prevent ballooning loan defaults.

The industry lobby group says current ‘concerns’ in the credit market mainly include the deterioration in the quality of loans after an estimated Sh130 billion ($915.49 million) worth of the industry’s loan book turned bad in 12 months.