Borrowers feel pinch as banks raise loans cost
Hundreds of thousands of individual borrowers and small businesses have started feeling the pain of the high cost of loans after the Central Bank of Kenya increased its base lending rate two weeks ago.
The move prompted commercial banks to embark on the review of interest on existing and new loans, a move likely to cause controversy over whether new rates should apply to existing loans.
Following the move by the regulator, banks have commenced raising their lending rates starting this month, meaning that borrowers will now pay more for every shilling they have borrowed either for consumption or to expand their businesses.
Given the tough economic conditions that Kenyans are already facing following an increase in the cost of fuel, the increase in loan rates is likely to increase the risk of defaults.
Various Kenyan banks have already increased their rates, with Equity Bank and Standard Chartered Bank being among the first tier one banks to do so.
“Following the increase of the Central Bank Rate (CBR) from 9.5 per cent to 10.5 per cent on June 26, 2023, we wish to advise our customers that we shall adjust our loans interest rates to reflect a revised Access Bank Base Rate of 14.5 per cent,” said Access Bank in a notice sent to members this week.
Market conditions
Similarly, Standard Chartered last week increased its lending rate from 10 to 10.5 per cent, reflecting the changing landscape of the banking industry.
Equity Bank, however, has implemented one of the largest rate increases in the industry, having raised its loan rates from 12.5 to 14.6 per cent. NCBA also raised its rates marginally from 12 to 13 per cent.
The latest adjustments aim to align the banks’ rates with the prevailing market conditions and the increased cost of borrowing for financial institutions. This jump indicates the banks’ efforts to manage their loan portfolio and mitigate against risks associated defaults. However, the overall impact will be felt most by borrowers because they now have to cough up higher monthly repayments at a time when take-home salaries for employed workers will be eroded by new tax measures, including the Housing Levy, while small businesses now have to pay a turn-over tax at three per cent of revenue.
“Following the adjustment of CBR on 26th June 2023 from 9.5 per cent to 10.5 per cent, we wish to inform our customers that we shall adjust loan interest rates to reflect a revised Equity Bank Reference Rate (EBRR) of 14.69 per cent plus a margin based on the customer’s credit risk with effect from 10th July 2023,” said Equity in a notice to its customers.
Peak numbers
Latest data from Central Bank has indicated that many borrowers were already struggling to meet their credit obligations as they direct limited resources to cover basic needs in the face of inflation. The new development will only pile pressure on their disposable incomes in the face of high costs of health, education and various consumer goods and services.
Central Bank CBK data indicates that the rate of non-performing loans (NPLs) rose to 14 per cent in February compared to 13.3 per cent in December last year.
“NPLs were noted in the trade, personal and household, manufacturing and building and construction sectors,’’ CBK said.
Gross NPLs stood at Sh161 billion. Whereas both the NPL ratio and stock show an increase compared to the previous year, there is a remarkable reduction from the peak numbers recorded in June last year, when NPLs stood at 21 per cent.
The higher cost of borrowing could strain individuals’ and businesses’ incomes which is expected to lead to difficulties in meeting their loan obligations or other necessities. This scenario could pose risks to banks besides increasing the number of properties put on auction to recover overdue loans. Yesterday alone, one newspapers published nine pages of distressed properties that auctioneers have put under the hammer due to defaults on loans.
While the recent increase in the CBR was aimed at curbing inflation and maintain macroeconomic stability, it has triggered a chain reaction in the banking industry as financial institutions adjust their lending rates to protect their profitability and manage the risks associated with a changing economic landscape.
When he announced the higher rates, the new Central Bank of Kenya governor Kamau Thugge, said the move was necessary to stabilise the economy. However, it also raises questions about the affordability of loans for borrowers and whether the new rates should apply to new or old loans or both given that Kenyan law does not apply backwards.
Small businesses and individuals with existing loans may face increased financial pressure, which could hamper their ability to invest, expand or meet other financial obligations. It could also trigger a re-evaluation of both private and corporate spending priorities in the short and medium term as some cutbacks will be necessary to meet the increased loan repayments.
In the short term, financial experts have advised borrowers to engage with their respective banks to explore possible solutions, including loan restructuring or refinancing as part of their strategy to manage the higher interest rates. This will, however, mean extending the loan terms for borrowers.
Responding to the trend, major Saccos have already reached out to their members, urging them to buy off the loans from banks so that they can cushion them from paying the higher rates since Saccos have standard rates. This could lead to an increase in Sacco loan portfolios backed by collateral, a trend that has not taken firm root in the Kenyan economy where most loans are guaranteed by savings and guarantors.
Analysts have said that striking a balance between maintaining the financial health of the banks and ensuring affordability for borrowers will be critical in sustaining a stable and inclusive banking system, including cushioning borrowers from the emerging shocks.
