[ Courtesy ] Commercial banks are cutting their loan exposure to State-owned enterprises (SOEs) amid increased default risk. This is as some of the parastatals tap borrowings to pay salaries.
Latest Central Bank of Kenya (CBK) data shows that banks’ net loan book to parastatals fell for the three consecutive months to close July at Sh76.3 billion — the lowest since February 2017.
The drop in the loan book to parastatals is an indication that the value of maturing loans is higher than the fresh lending to many of the loss-making parastatals.
CBK said in a report released last month that a decline in profitability and cashflow problems has seen some of the State entities tap loans to meet expenses such as salaries. READ MORE
The reduced lending to parastatals has cut the credit exposure to the public sector, excluding the national government, to Sh83 billion — the lowest level in five years. CBK said in the Financial Sector Stability Report for 2020 that State-owned entities (SOEs’) long–term debt to assets and long–term debt to equity ratios have declined, exposing banks to vulnerabilities given that SOEs are among the top 10 largest borrowers.
“This (drop-in ratios) may indicate that SOEs used long–term debt to meet operational expenses rather than investing in assets, thus limiting productivity, expansion capacity and profitability,” said the CBK.
“The decline in profitability and cashflow problems exacerbates indebt either a deficit or a loss in the financial year ended in June 2020.”
This is attributed to a slowdown in economic activity, competition from cheaper imports and weak corporate governance, posing a risk to their viability.
Banks have struggled to collect their debts from struggling State corporations, resorting to auctioneers and placing some of them under receivership in a bid to recoup their money.
State entities such as East African Portland Cement, Mumias Sugar, Kenya Power, Kenya Airways and Kenya Railways have all struggled to pay lenders their money in the recent past.
Sugar millers such as Chemilil, Muhoroni, Nzoia and Sony Sugar have continued to be insolvent, making them struggle to repay loans.International Monetary Fund has been pushing Kenya to start rolling out reforms in State-owned entities, including trimming the headcount to make their business models sustainable.SOEs have also continued to benefit from billions of shillings transferred from the exchequer, diving into the public opinion over the socio-economic benefits accruing to taxpayers.Treasury recently estimated that taxpayers may spend about Sh382 billion in sustaining operations of […]
