Zachary Ochuodho @zachuodho
Commercial banks need to tighten their credit standards to contain the rising levels of non-performing loans (NPLs), which have increased by 0.8 percentage points from the first quarter (Q1) of this year.
The tightening of credit standards will allow commercial banks to manage the industry-wide deteriorating asset quality.
According to a report released yesterday by Cytonn Investment Management, the level of NPLs remains a major concern within the banking sector.
Caleb Mugendi an investment associate at Cytonn said real estate, manufacturing and retail sector were the major contributors to the increasing levels of NPLs.
“The weighted average gross NPL ratio for the listed banks declined from 9.6 per cent in Q1 2018 to 10.4 per cent in the subsequent quarter this year and if the trend persists, it will impact on banks’ bottom line, due to associated impairment charges, especially after adoption of the new IFRS 9 standard,” he said.
Mugendi attributed increase in NPLs partly to non-payment of pending bills by counties and national government.
During the Budget day, Treasury said that it has set aside Sh10 billion to offset part of the Sh300 billion which it owed business entities.
Mugendi asked commercial banks to focus on improving efficiency, growing non-funded income and containing asset quality deterioration to boost their earnings.
Ian Kagira, an investment analyst said banks had improved performance on aggregate, as they recorded improved profitability, in a relatively tough operating environment.
“Increased emphasis on operating efficiency by banks seems to be bearing fruit, which was further supported by a recovery in interest revenue, largely supported by the asset re-allocation to government securities, and increased lending to specific segments,”said Kagira.