Report tips lenders on post-covid-19 shocks
Steve Umidha @UmidhaSteve
Debt burden, credit losses and possible higher interest rates will be a new normal in the post-covid-19 period, says a new report.
Dubbed Finding Balance: The Post-COVID Landscape for Financial Institutions, the report by Baker McKenzie warns banks of a bumpy ride ahead on the back of lockdowns imposed by governments to tackle the public health emergencies following Covid-19 shocks.
The report which was launched yesterday notes that consequent disruption to supply chains and the reduction in demand by firms whose business models are impacted by social distancing will almost certainly trigger defaults and bring their viability into question.
“While the big banks have been affected by the pandemic, they still have liquidity and strong capital levels and should not need to raise capital as a result of the impact of Covid-19.
However, pandemic relief programmes will soon need to be paid back and it remains to be seen how this debt will be managed in the current economic environment,” says Wildu du Plessis, Partner and Head of Banking and Finance at Baker McKenzie.
Further, lenders are being warned to expect higher interest rates in future should the aforementioned factors begin to be felt.
“A further unknown concerns the path of interest rates in the future, currently at historic lows,” reads in part the report.
Currently interest rate in Kenya averages 7 per cent and is expected to remain so by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations, amid projections they will average 6.75 per cent in the next 12 months.
When interest rates rise, ordinarily the cost of borrowing goes up, which can discourage consumers from borrowing.
People with existing variable loans or credit card debt might have less disposable income if they need to pay more in interest costs.
In either case, consumer spending falls which has a slowing effect on the economy.
The report outlines a trend towards increased regulation and supervision of financial institutions – which will require organisations to act in their clients’ best interests over and above strict contractual obligations.
This will include paying close attention to regulators’ expectations and receiving added motivation in light of the flexibility and restraint shown towards customers in the initial stages of lockdowns.
The report notes that financial services regulatory frameworks in Africa have improved substantially in recent years, which has aided regulators in their response to the COVID-19 crisis.
Coming in the wake of an expected surge in demand for credit on the back of the December festivities, however, many will desire to borrow but clearly their ability will be limited.
Many prospective borrowers will be disqualified because they are out of jobs.
“From a small one-third seeking moratorium when the CBK gave the directive in April, we now see almost two-thirds seeking it.
It clearly shows depletion of household savings in the last 6 months despite the reopening of the economy,” says Kamau Macharia, a financial expert.