Hard times for banks as NPLs rise, growth slows

Saturday March 1 2014

By MARTIN LUTHER OKETCH Special Correspondent

Uganda’s non-performing loans (NPLs) rose 40 per cent in the 12 months ending December 2013 fuelled by a volatile economic environment that saw banks struggle to meet their loan obligations. A non-performing loan is either in default or close to being in default.

Data from the Bank of Uganda (BoU) shows that NPLs rose to six per cent of total loans in 2013 compared with 4.2 per cent in 2012. The rise in NPLs came even as growth in banks slowed to 6.6 per cent compared with 11.6 per cent in 2012.

The growth in NPLs in Uganda mirrors the trend in Kenya, where non-performing loans grew by 30 per cent to Ksh80 billion ($919 million) in the same period, though total NPLs as a fraction of total loans and advances shrank from 5.4 per cent in 2012 to five per cent in 2013. The drop was because total loans grew significantly, diluting the impact of the rise in NPLs.

In Kenya, the NPLs grew largely because of the new Central Bank of Kenya rules that demand a stricter classification of NPLs.

“It is apparent that the 2011/12 macroeconomic instability in Uganda affected the level of non-performing assets in banks. However, prudent measures have been taken to ensure that the asset quality of the banking system improves over the next six to 12 months,” said BoU director of financial stability Charles Abuka.


Eroded earnings

Rising NPLs mean that banks have to set aside part of their profits to cover for this category of loans, a factor that erodes their overall earnings. Their rise is likely to highlight the need to expand the number of borrowers covered by credit reference bureau (CRBs) in the region.

Dr Abuka said BoU was mitigating the risk that bad loans posed to the banking industry through measures that seek to improve asset quality.

“The banks are required to provision adequately and to carry out due diligence in credit assessment to avoid accumulating bad loans,” he said.

Dr Abuka remained optimistic over Uganda’s financial stability, “We expect an improvement in the level of non-performing assets over the next 12 months. It is also our expectation that credit to the private sector will continue to pick up.”

The central bank said credit to the personal and household sector grew 40 per cent for the period ended December 2013 compared with a decline of 14 per cent recorded over the same period in 2012.

Centenary Bank managing director Fabian Kasi, whose bank’s non-performing loans stood at 2.8 per cent, said that from commercial banks’ point of view, levels of non-performing loans increased because of volatilities in Uganda’s macroeconomic environment experienced in 2011/2012, which resulted in low economic activity, softened demand and high interest rates.

BoU responded by reducing its policy rate from 23 per cent in February 2012 to 11 per cent in June 2013. The reduction has seen a rise in shilling-denominated borrowing after a dip in 2012.

Though there has been a pick-up in economic activity leading to a rise in the country’s GDP growth rate in the financial year 2012/13, it has been mainly driven by the government through increased public expenditure.

The International Monetary Fund said Uganda’s economic recovery continues to gain momentum, mainly driven by public investment, and supported by appropriate policies — GDP growth reached 5.4  per cent in 2012/13.

Additional reporting by Peterson Thiong’o