US-based Moody’s Corporation, one of the world’s leading credit rating agency, has warned that measures put in place to shield Kenya’s banks from disruptions associated with the coronavirus outbreak, might not hold should the situation worsen.
In its latest research note analyzing the impact of Governments’ coronavirus measures on Mauritian, Kenyan and Democratic Republic of Congo’s banks, the agency notes that prolonged disruptions in key sectors could slow down the economy and cause severe problems to banks as customers default on their loans.
Although the Central Bank of Kenya says it will relax rules dealing with provisioning for loan losses by banks, it has yet to provide any specific details on this proposal. A number of monetary policy measures that have already been taken to protect both the lenders and the borrowers, some already taking effect beginning 1st April 2020.
At its March 2020 meeting, the Central Bank of Kenya (CBK)’s Monetary Policy Committee lowered the policy rate to 7.25 per cent from 8.25 per cent as well as reduced the cash reserve ratio for banks. These measures provide headroom for commercial banks to lower the price of their loans.
The CBK has been encouraging distressed borrowers to negotiate for a new repayment schedule with their lenders. But now Moody’s warns that banks exposed to personal loans could experience a deterioration in the quality of their balance sheets.
“Among the rated banks, Equity Bank (Kenya) Limited faces the greatest exposure because 59 per cent of its loan book was exposed to SME lending as of the end of December 2019,” said Moody’s. Equity Bank has been given a credit rating of (B2 stable, b21).
Available data indicates that as at June 2019, 1/4 of all loans given by Kenyan banks was personal loans followed by trade loans at 19 per cent of total loans.
Moody’s rates Co-operative Bank of Kenya Limited’s (B2stable, b2) with an SME lending exposure was 6per cent of its total loan book as at June, 2019, while at KCB Bank Kenya Limited (B2 stable, b2) with a personal loans exposure of 4 per cent.
Out of the three largest retail banks, Equity Bank has stronger liquidity buffers and higher liquid assets than its rated domestic peers, which will help mitigate asset-quality pressure.
CBK has been encouraging banks to reschedule loan contracts of affected customers who had performing obligations as of 2 March,2020 including possible repayment moratorium of up to a year for individuals. While Banks will absorb all related costs, it is still unclear whether what portion of these personal loans will be rescheduled.
Moody’s mentions that while banks are free to renegotiate loans and avoid deterioration of its asset book, these monetary measures could have minimal effects if the coronavirus pandemic and its economic effects persist for long.
Kenya’s Central Bank has cut its GDP growth rate to 3.4 per cent down from the previous estimates of 6.2%. CBK has also reduced in the cash ratio for banks to 4.25 per cent and cut in deposit rates, is expected to improve liquidity in the banking system.
The CBK has also reduced cost of using mobile money, to enable Kenyans to transact without the use of cash, thereby limiting transmission of the coronavirus. Despite the various support and liquidity measures to be implemented, it is the small and midsize enterprises (SMEs) that will bear the brunt of the economic disruption.