Ugandan banks are facing a sharp rise in non-performing loans for the three-month period ending this month, dashing any hopes of a profitable year.

This underlines the pain that businesses and households are suffering under a high interest rates regime. Borrowers continue to battle the high cost of living in the wake of a slowdown in economic activity.

The Bank of Uganda, in its latest lending survey released last week, said that half of the banks (50.9 per cent) expect default rates on loans to households and individuals to increase over the quarter. Another 30.1 per cent of the lenders expect default rates to remain the same while 19 per cent expect a drop in defaults.

The default rates are expected to rise further in the quarter ending December 2013, hurting the profitability of the banks.

A loan is considered non-performing if it remains unserviced for more than three months.

Default rate

“Factors cited for the increase in default rate (on loans to households and individuals) are delayed salary payments for civil servants in the case of salary loans, joblessness coupled with increasing rates of employee layoffs and the high cost of living,” said the BoU report.

Uganda’s year-on-year inflation surged to the highest in a year last month, on the back of high food and fuel prices, leaving borrowers prone to loan default. Inflation rose to 7.3 per cent in August, from 5.1 per cent the previous month.

Banking executives said while they are likely to continue easing lending to households in the coming months, businesses will face relatively stricter loan appraisals. This means that businesses may be exposed to relatively expensive loans for the remaining part of the year, denying them funds for expansion.

But the demand for loans is expected to edge higher in the coming months.

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“The key factors given for these credit demand expectations are a further reduction in interest rates; anticipation of increase in working capital requirements following a likely rise in business activities as traders stock up for the festive season; alignment of credit products to customers’ needs; continuous improvement in the economic outlook, and payment of school fees,” said the BoU.

Bankers showed a bias towards net easing in the quarter ending September 2013. This could be as a result of the continued easing of the central bank rate (CBR) coupled with a substantive decrease in the cost of borrowing and the continued, albeit slow, picking up of economic activity, analysts and bankers in Uganda said.

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Improved liquidity

A similar positive outlook is expected in Kenya. Bankers in Nairobi project lending rates to remain stable or decline slightly in the remainder of 2013 due to improved liquidity. But short-term inflationary pressure and a pick-up in economic activity could exert some pressure, said the Central Bank of Kenya in its Market Perceptions Survey released a fortnight ago.

The CBK said both supply and demand for credit are expected to increase in the remainder of 2013, with an expected picking up in economic activity.

A rise in default rates in the remaining part of the year in Uganda could hurt prospects for the local banks as well as Kenyan lenders with subsidiaries in Uganda, like Equity and KCB.

The forecast comes on the back of poor results for the half-year period ended June this year that saw listed lenders such as Stanbic Bank Uganda and Bank of Baroda Uganda report a drop in profitability as a result of reduced lending due to high interest rates.

Kenya’s Equity Bank, Bank of Africa (BoA) and Imperial Bank also posted reduced profitability from their Uganda subsidiaries through the first six months of this year and if the predictions come true, other units of these banks may be forced to support those in the country.

“At the end of last year, subsidiaries contributed 15 per cent of the total profit but, because of the strain that South Sudan was going through and the suspension of donor budgetary support in Rwanda and Uganda, we saw the subsidiaries contributing 13 per cent,” said James Mwangi, Equity Bank’s chief executive officer.

Difficult year

The BoU survey shows that 46.7 per cent of the banks expect defaults on loans to enterprises to remain the same, 32.3 per cent expect an increase and 20.2 per cent expect defaults on loans to enterprises to drop.

Faced with high default rates, many banks are eyeing loan recoveries to shore up their revenues in a rather difficult year.

“The government is not paying suppliers on time. Several banks are now relying on credit recoveries to boost incomes in the remaining months of 2013 since non-interest incomes can no longer buffer our revenue streams due to stiff competition from mobile money services,” said Phillip Sendawula, finance manager of Diamond Trust Bank Uganda.

Executives from all the 24 banks and 81.7 per cent of the seven non-bank financial institutions polled in the country said that Uganda’s economy had slowed, negatively affecting the business environment and leading to layoffs.

“Key factors cited for the expected increase in default on loans to enterprises were the slowdown in economic activity, which has affected the cash flows of borrowers; increase in non-performing loans, as the repayment portfolio does not show any signs of recovery; and the delayed payments by government to enterprises,” the BoU said.