Download The challenge of bad loans is likely to persist

The Star ­ Thursday
Date: 12.05.2016
Page 20
Article size: 84 cm2
ColumnCM: 18.66
AVE: 32853.33
The challenge
of bad loans is
likely to persist
The current banking crisis exposes
the vulnerability of the banks
in the local market to varying
degrees, In the past few years, we have
witnessed fast growth in credit, fueled
mostly by strong marketing by the
This means by the time the NPLs
materialise, the cumulative effect is
large, and often out of control. The result
is a rise in the level of NPL in the industry
at best, and a banking crisis at the worst.
The CBK bank supervision reports tell a
banking industry, and optimism about
similar story. Gross loans have grown by
63 per cent from Sh1,190 billion in 2011
the macroeconomic environment on
to Sh1,941 billion in 2014. In the same
the part of borrowers. Furthermore, the
emphasis has been on the access to
credit, with less regard to the cost of the
period, gross nonperforming loans have
credit. The growth in the nonperforming
period of four years.
In its 2015 Banking Sector report, Cytxnn
loans ­ NPL ­ that is the crux of the
current crisis highlights the importance
of linking the macroeconomic
conditions to the health of the banking
industry. It also highlights the structural
vulnerability in the financial industry
to shocks, in particular losses in the
loan books. In fact the main goal of
macroeconomic stress tests, which
have become more common post
the global financial crisis in the more
developed economies, is to assess
resilience of each bank to such shocks.
grown from Sh60 billion to Sh108 billion.
This is an increase of 80 per cent in the
Investments has reported an increase in
the listed bank's loan loss provision by
85.4 per cent.
This has implication for bank supervision
and regulation. Regulation may need
to take into account the role of both
macro­factors and bank specific
characteristics in determining the level
of nonperforming loans. In particular,
a stronger focus on macro­prudential
regulation is necessary through capital
and liquidity buffers, and countercyclical
provisioning to help in mitigating the
Generally speaking, NPL ratio worsens
as economic growth becomes lower and impact of macroeconomic risks. Also
interest rates increase. Also, large banks equally important are macroeconomic
and banks with higher efficiency ­ lower stress tests on individual banks, to test
resilience to macroeconomic shocks.
expense ratios ­ tend to have lower
NPLs. Furthermore, high credit growth in Moreover, the persistence of high
the past is a key indicator of higher NPLs interest rate regime is also a stronger
in the future. According to research,
indicator that NPLs are likely to be a
NPLs are persistent and take time to
continuing challenge in the banking
respond to the macroeconomic cycle.
industry, unless the market experiences
higher growth rates.
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