Non- performing loans affecting banking sector
The banking industry is considering a recapitalisation to shore up its profitability levels, which are rattled by high operating costs and non-performing loans.
The industry is struggling to register profits despite increased spending on operations over the past couple of years in addition to attracting high levels of investment.
Some lenders including Kenya Commercial Bank (KCB), Equity Bank and GTbank have been forced to make loan loss provisions to cater for the loans written off their balance sheets.
“Most banks are considering or have already added more capital into their operations as profits are being weighed down by high non-performing loans and high operation costs,” said Maurice Toroitich, managing director of KCB Rwanda.
On the operating basis, bankers said their cost-to-income ratio is estimated 70 per cent.
Although the banks’ consolidated non-performing loans fell to 6.6 per cent from 6.9 per cent last year, it is still above the central bank’s cap of 5 per cent.
Banks are mainly feeling the pinch through the provisions designated to cover written off loans.
For example, during the past nine months, KCB allocated Rwf1.2 billion provision for bad loans while injecting Rwf1.1 billion as additional capital. However, the bank registered a Rwf4 billion loss.
In the 2013/2014 period, Equity bank capitalised its operations to the tune of Rwf5 billion as it allocated Rwf306 million provision for bad loans. It registered a loss of Rwf2.2 billion, nonetheless.
“The non-performing loans appear low but in actual sense, its covered by the high level of loan loss provisions, which banks draw from their profits thus disguising the fact that NPL is not too high,” added Mr. Toroitich.
Cogebanque is one of the banks with a small loan loss provision at Rwf22 million coming down from Rwf1.1 billion last year.
Individual borrowers’ micro, small and medium enterprises are considered to be the highest defaulters.
This could prompt banks to increase lending to corporate institutions and cutting loans going to individual, micro small and medium enterprises because they are considered to be high risk clients among lenders.
However, banks have seen their assets grow despite poor profitability and this mainly due to increased investments by particular banks.
From January to September, KCB grew its balance sheet by 41 per cent compared with same period last year while GTbank has grown its balance sheet by 16 per cent.