Banks have been tipped to slow down new lending by tightening credit standards to deal with the heightened risk of defaults in a rising interest rate environment.

According to analysts, the tightening of terms will likely slow the momentum of private-sector credit growth.

“Over the same period (second quarter of 2023), commercial banks noted a surge in the industry’s non-performing loan ratio which clocked 14.9 percent as of May 2023. We expect lenders to tighten credit standards over the medium term,” analysts at Genghis Capital said.

In the opening quarter to March 2023, banks retained credit standards for facilities in all 11 sectors, as surveyed by the Central Bank of Kenya (CBK).

“In the quarter ended March 31, 2023, seven factors had little impact on credit standards whereas Covid-19 and expectations regarding general economic activity led to tightening of credit standards, especially in building and construction sectors,” the CBK said in its quarterly credit survey report to March.

Other factors shaping credit standards, according to the CBK, include banks’ cost of funds, their capital positions, competition and other financial institutions such as saccos and micro-lenders, an increase of the Central Bank Rate and investment in government securities.

The growth in private sector credit stood at 13.2 percent in both April and May 2023. A strong credit growth was observed in manufacturing, transport and communication, trade and consumer durables.

The number of loan applications and approvals remained strong, reflecting increased demand and resilient economic activities, according to the CBK.

The escalation of non-performing loans has been noted in manufacturing, trade, real estate, transport and communication.

May’s non-performing loans ratio mirrored the highest rate of loan defaults during the Covid-19 crisis.