Kampala. Banks expect loan default rates to increase on the account of a volatile economic environment characterised by a weak shilling and rising inflationary pressures, according to the Bank Lending Survey Report released last week.
According to the 2017/18 fourth quarter report compiled by Bank of Uganda, businesses that hold dollar denominated loans are likely to default because of persistent depreciation of the shilling against the dollar.
The shilling has depreciated by more than 7 per cent since the beginning of the year and is projected to weaken further.
Market experts have projected that the unit might hit the Shs4,000 mark before the end of the year.
The shilling last week maintained relative stability at a range bound of Shs3,824-3,840.
“The expected increase in default rate on loans is mainly attributed to the likely impact of the depreciation of the shilling against the dollar particularly from [businesses] that borrowed in foreign currency,” the report reads in part.
Market conditions, including inflation, among others, have previously influenced growth in default rates.
In 2012 up to 2014, banks experienced growth in default rates, following the 2011 volatile economic environment that was characterised by runaway inflation, high fuel prices and high interest rates.
Interest rates averaged at 30 per cent coming on the back of unprecedented inflation that hit an all-time low of 39.3 per cent in more than 20 years.
The Bank Lending Survey Report surveyed 24 banks and nine non-banking institutions, all of which projected an increase in default rates.
Current default rates stand at 3.7 per cent but projections indicate it might grow to about 4.5 per cent.
However, the report indicates banks are optimistic that default rates on household loans “will decrease in the coming three months”.
The survey seeks to enhance the Central Bank’s understanding of the lending behaviour and loan financing conditions among deposit-taking institutions as well as capture key information on credit development.
Banks have been registering growth in non-performing loans that in 2017 stood in the excess of Shs650b down from Shs557.8b in 2016.
In 2017, the highest non-performing loans were recorded by Barclays Bank at Shs107b or at least 10.3 per cent of its loan book.
Dfcu’s grew to Shs96.6b while Standard Chartered Bank registered about Shs78.6b in non-performing loans.
Mr Wilbrod Owor, the Uganda Bankers Association executive director, said last week that although there challenges, banks have remained optimistic and continue to innovate with the view of curtailing the rising cost of business.
The innovations, such as agent banking, he said, will mitigate the problem of rising interest rates that remain a de-incentive and a default factor for many borrowers.
“We remain optimistic that [we shall] address the challenges,” he said.
The banking sector has also seen a tightening regulation regime that seeks to lower default rates among non-secured loans. Default rates for households stand at 3.5 per cent.
However, the new regulation regime, according to the survey, could make access to loan facility difficult thus forcing borrowers to resort to informal sources.
According to a 2018 FinScope survey, few Ugandans borrow from banks because loans are conditioned to be accessed by urbanites.
Mr Owor said banks are innovating to ease access to loans with a view of reducing the loan access period to an average of 24 hours.
Seeking to ease access to credit facilities
Banks, according to Mr Wilbrod Owor, the Uganda Bankers Association executive director, continue to make a number of innovations, key among them agent banking, which has a membership of 977.
Such innovations, he says, seek to ease access to credit facilities amid a volatile loan environment. Other innovations such as mobile money collaborations, among others have also been established to ease micro lending.