Eight tier-1 banks including Equity, KCB and Stanbic have increased their loan-loss provisions by 45.8 percent to Sh62.5 billion in the third quarter of this year in anticipation of massive defaults due to a tough operating environment.

In the third quarter of 2022, the eight large lenders put aside Sh42.9 billion as insurance cash against potential defaults, or what is known as loan-loss provision.

The Sh62.5 billion loan loss provision is close to what these lenders set aside in a similar 2020, a pandemic period when most borrowers were offered debt repayment holidays, analysis of financial statement shows.

The data shows that three of the eight banks have set aside a record stockpile of insurance cash in the review period.

The loan-loss provision for Equity Bank, I&M and Stanbic has surpassed what they had set aside in a similar period during the Covid-19 pandemic year.

In the review period, the Nairobi Securities Exchange (NSE)-listed Equity Bank was forced to increase its provisions by 96.6 percent to Sh19 billion from Sh9.66 billion in September last year, thus reducing its profitability.

Stanbic, also listed on the NSE, increased its provisions by 56.6 percent to Sh4.48 billion in September from Sh2.86 billion in a similar period last year.

I&M Bank has increased its provisions by a third to Sh4.4 billion in September from Sh3.4 billion in similar period last year.

Loan-loss provisions for the other five banks — Co-operative Bank, NCBA, Absa, Standard Chartered and KCB — in were not as high as in the pandemic period. NCBA and Co-op Bank recorded a drop in loan-loss provisions.

Where principal or interest is due and goes unpaid for 90 days, the Central Bank of Kenya (CBK) requires banks to set aside funds just in case borrowers default.

Non-performing loans (NPLs) or loans that have not been serviced for more than three months have been rising, pointing to a tough operating environment, which has been aggravated by the devaluation of the shilling, high-interest rates and sky-high inflation.

“At the household level, we are still struggling with inflation and price of commodities, particularly food and energy, and this has caused a significant strain on consumers,” said James Mwangi, the CEO of Equity Bank in an investor briefing.

CBK data shows that the ratio of NPLs to gross loans increased to 15 percent in August from 14.2 percent in August last year.

NPLs surged to a record Sh611.4 billion for eight months up to August from Sh505 billion in similar period last year, explaining the increase in loan provisions.

Deepak Dave, the founder of Riverside Capital, noted that in an era of high income from interest rates, “banks have more operational margin to devote to padding their losses.”

“Secondly, tough times ahead arising from a rapidly weakened operating environment,” added Deepak.

Businesses are grappling with high-interest rates, a weaker shilling and sky-high inflation.

High-interest rates stemming from the tightening of the supply of money by the CBK to bring down the high consumer prices have also contributed to increased defaults.

The new tax measures implemented by the administration of President William have also reduced the disposable income for most households and businesses, making it hard to service loans.

“This is a sign of tough times to come. It is a very tough business environment. The disposable income is reducing and the borrowers are finding it harder and harder to sell their products and services,” said Kunal Ajmera, the chief operating officer at Grant Thornton Kenya, an audit firm.

In 2020, most banks put up one of the largest cash buffers against potential defaults by borrowers negatively affected by the Covid-19 pandemic.