Approved loans decline as banks become risk averse 

Friday September 18 2020
finance01pix

Banks have slowed lending to the private sector because of uncertainties manifested through slowed business. Photo | EDGAR R BATTTE

By Christine Kasemiire

The value of loans approved in July dropped by Shs59.2b compared to June on account of increased risk aversion by lenders. 

Data from the Ministry of Finance Performance of the Economy report for August indicates that despite reduction of the Central Bank Rate (CBR) and continued easing of lockdown, banks are hesitant to lend now than last month. 

“Value of loans approved in July 2020 fell by 7.7 per cent to Shs711b from Shs770.2b in June. This reduction in new credit is partly attributed to increased risk aversion by lenders following an increase in non-performing loans to total gross loans from 5.41 per cent in March to 6.01 per cent in June 2020,” the report reads in part. 

The concern of non-performing loans is currently weighing down on lenders who project a substantial increase on account of the impact of Covid-19 on the business environment.

Bank of Uganda in April permitted lenders to restructure customer loans in a bid to increase business liquidity.
However, some of the restructured loans are due to mature yet the economy is yet to recover. 

Mr Wilbrod Owor, the Uganda Bankers Association executive director, said recently the level of non-performing loans had risen by Shs123b in the quarter ended June, which means there is Shs894b worth of loans on which no payment has been made.

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In addition, he said, the recent outlook and stress tests indicated that non-performing loans might rise to 7.2 per cent, which will be equivalent to Shs1.2 trillion by end of September or 9.1 per cent, equivalent to Shs1.33 trillion by end of December.

This is likely to deter commercial banks even further from extending new credit at a time when businesses are posturing for recovery.

Lowered interest rates
It is also worth noting that commercial banks were in July forced to lower interest rates after Bank of Uganda threatened to take drastic actions. 

While Bank of Uganda sought to increase access to credit, the lowered rates and increased risk under the current lending conditions could have in part occasioned low loan approvals. 

“There is a risk premium inherent in the interest rate that they charge. So, if they are charging lower rates, it might contribute a little bit to reduced approvals because they will be more prudent in risk management such as checking the creditworthiness of the client they are lending to,” Ms Suzan Khainza, a chartered financial analyst and chairperson branding and public relations committee, CFA Society East Africa, said in an interview with Daily Monitor.

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