Delays by the national and county governments in paying businesses that trade with them have been blamed for a fresh spike in non-performing loans (NPLs) in the banking sector.

This even as the Government has lately come under scrutiny for paying out billions of shillings to dubious suppliers as cited in the latest Sh9 billion National Youth Service (NYS) scandal, with the genuine ones going unpaid for months on end. A recent survey by the Central Bank of Kenya (CBK) has revealed that a significant share of NPLs is due to delayed payments from the two levels of government as well as the private sector. The current state of affairs is part of the reason why the ratio of gross NPLs to gross loans increased to 12.4 per cent by April from 11.4 per cent in February. The most affected sectors include real estate, trade and manufacturing.

According to CBK Governor Patrick Njoroge, NPLs have been inching up “little by little” in what has become a major concern for the regulator. He said if both the national and county governments honoured their obligations on time, NPLs could drop by at least 100 basis points. “We did a more detailed survey and talked to many bankers about one particular issue – delayed payments by government and private sector,” said Dr Njoroge at a recent press briefing in Nairobi. “Actually, about 10 per cent of banks’ NPLs relate to these delayed payments by the Government and the private sector. That is substantial. It is a bit of a catch-22. It is a big issue.” As at end of February, CBK said in its monthly economic indicators report that gross NPLs stood at Sh277.7 billion out of the 2.43 trillion gross loans.

This means that about Sh28 billion had turned into bad loans due to delayed payments linked to the Government. Njoroge said the prevailing situation had made it difficult for suppliers who genuinely deliver goods and services in the hope that they will be paid on time so as to repay their loans.  Those who supply to private businesses that are engaged in contracts such as building roads for counties, he said, have also not been spared. Delayed payments put a strain on the entire supply chain. Such delays have proved costly to borrowers. Newspapers have been replete with adverts of auctioneers calling on the public to make bids for vehicles that have been repossessed after borrowers defaulted on their payments. Kenya Commercial Bank and NIC Bank account for the bulk of the adverts.

In January, KCB Chief Executive Joshua Oigara said delays by the Government to pay small and medium-sized enterprises (SMEs) had seen many of the entities lose their commercial vehicles to the auctioneers’ hammer. He termed it “the biggest problem facing the SME sector”, even as he revealed that the bank had been forced to auction over 250 vehicles over unpaid loans mostly in the hands of people who did business with county governments. “We are selling vehicles and I am sure the owners did nothing wrong. They did the job, transported the materials, delivered goods and sent invoices but they are waiting. Most of them have not been paid for almost two years,” said Mr Oigara. According to the Controller of Budget Agnes Odhiambo, part of the challenge is the Integrated Financial Management Information System (IFMIS) connectivity challenges and frequent downtime. In the County Governments Budget Implementation Review Report covering six months to December last year, Ms Odhiambo singled out West Pokot, Vihiga, Tharaka Nithi, Turkana Siaya, Kilifi, Lamu, Makueni, and Embu counties as among those that experienced IFMIS connectivity challenges. “The office observed that counties experienced operational delays as IFMIS was unavailable on a number of days in the reporting period which affected approval of procurement requests and payments to suppliers and staff,” she said in the report.

According to the CBK guidelines, any borrowed money on which the debtor has not made scheduled payments for a period of three months (90 days) is classified as a non-performing loan. As at the end of December last year, the banking sector’s NPL ratio for building and construction sector was at 17.3 per cent while that of trade was at 16.5 per cent. Manufacturing and real estate sectors followed at 12.8 per cent and nine per cent respectively. Equity Group’s NPL ratio for micro-SMEs was at 14.9 per cent, with Chief Executive James Mwangi saying lending to the sector at 14 per cent is impractical. He reckoned that minimum risk should be 18 per cent.   “You make a loss even before you disburse the loan,” he said during the release of the group’s first-quarter results. As at end of March this year, Kenya’s largest bank by asset base, KCB, had trade NPLs ratio of 29.4 per cent while those from the manufacturing sector stood at 14.6 per cent, with the building and construction sector coming in second at 12.6 per cent. Governor Njoroge said the challenge in the real estate sector appears to emanate from the saturation in some of the building projects, key among them being shopping malls.



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