Tuesday, February 12, 2008

More on intrest rates

Bankers may increase interest rates to mitigate default losses
Last Updated on January 28, 2008, 12:00 am

By James Anyanzwa

Choked by high default risks, the banking industry is considering a way out of the deadlock.

Industry insiders, however, contend that a raise in interest rates features among the most viable options of recouping the losses incurred due to post-election skirmishes.

"At the moment, most borrowers’ loans fall in Grade One and Two, but this situation may change for the worse," say sources.

Grade one loans are those that have securities in place and are serviced normally without risk of default. Grade Two ones have instalments and interest payments lagging behind by one to two months, though banks are still confident they would be repaid.

Grade Three, however, are sub-standard loans as instalments and interests remain unpaid for over three months, forcing bankers to eliminate them from the books while calculating their profits.

"Sub-standard loans are serious to the profitability of the banks," said a top banker.

The banking industry is evaluating the extent of losses incurred in political shocks to decide the suitable response measures.

Disruption of businesses has left banks in a loans servicing crisis because most borrowers are unable to meet their debt obligations.

The banks have been exposed to additional risks related to unpaid debts when the industry appeared to have made irreversible steps towards ensuring asset quality.

High default rates are expected to translate into higher interest rates.

Lending rates have steadily fallen from more than 25 per cent in 2003 to between 10 and 15 per cent currently for secured loans.

Those unsecured at the retail level are between 13 and 19 per cent.

Private borrowing is, therefore, likely to slow down in the first quarter as banks raise rates to recoup losses recorded during the post-election turmoil.

Bankers, Central Bank and the Ministry of Finance are deliberating on the way forward for a sector key for economic stability.

However, the proposal could see private investments fall faster than expected, pushing the once booming economy into a big landing, analysts forecast.

"Banks may have to adjust their lending rates mainly to help support the losses they have suffered," says Mr Samuel Gichohi, an Investment Analyst at Francis Drummond and Company Ltd, a stockbrokerage firm.

"However, bond yields may not change significantly," he says.

Already details have emerged relating to losses incurred by a sizeable proportion of banking institutions through prolonged closures, vandalism of automated teller machines (ATMs) and shattered branches after violence erupted in various parts of the country.

"Banks have suffered substantial losses but are still functional," say sources

"But earlier return to normalcy will help mitigate these effects."

Small and medium sized entrepreneurs (SMEs), a key component of the banking customers, were prime victims of the violence.

Over the past five years, the country’s growth drive had hinged on increased credit to the productive private sectors of the economy, with financial institutions as well reaping from the favourable operating economic environment by registering impressive profits.

Supported by stable interest rates, that currently average roughly 18 per cent, lending to the private sectors of the economy had increased significantly during the period, further boosting the growth momentum.

Economic growth rose to 7.1 per cent by the second quarter of last year from as low as 0.5 per cent in 2003.

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