NAIROBI, Kenya, Mar 19 – The proposed credit relief measure by the Central bank of Kenya may lead to banks holding back extending new credit, according to experts.
Analysts at Genghis Capital said the move could lead to adverse selection whereby riskier borrowers are locked out of access credit.
Additionally, the move could also lead to moral hazard, where borrowers expect further relief in the future.
On Wednesday, CBK announced a raft of measures that commercial banks should follow to cushion borrowers from the impact of the disease.
These include providing relief to borrowers on their personal loans and offering restructuring plans for SMEs and corporates
“We tend to agree with Dr. Patrick Njoroge’s ‘this is just the first step’ remark. With no hard evidence yet of the economic knock, the CBK (and the banks) are trying to avoid a ‘Type II’ error; doing nothing in the face of a menacing lion,” the analysts say.
At the same time, the analysts said a lack of policy coordination is the weakest link, citing experiences in the developed markets where shortfalls of uncoordinated policy response, more specifically, use of monetary policy solely as first responders to the economic hit.
“We think comprehensive coordination could address such risks. In addition, as the business environment becomes more challenging, we expect a dip in tax revenues and in turn government spending.”
The analysts have recommended for there to be a further downward recalibration of the expected FY2019/20 Supplementary Budget II to factor in the potential dip in revenue, mainly shortfalls in Customs, Import Duty and VAT Imports.
Across town, economists at Standard Investment Bank welcomed the move, adding that Kenyan Banks – specifically Tier 1 banks – are well-capitalized to absorb the additional costs associated with loan restructuring.
The economists added that tier 1 banks are also capable of withstanding shocks associated with the virus.
The proposal by Njoroge includes an extension on the repayment period of personal loans eligible from March 2 by up to one year and reassessment and restructuring of SMEs and corporate loans.
A report by Cytonn Investments reveals that most businesses expect to be disrupted in several ways, which may lead to reduced ability to meet their loan interest payments.