Non-performing loans drop but credit extension remains subdued
Banks had in the last four years seen an upsurge in non-performing loans, but have started to register a decline. Photo / File
What you need to know:
- Bank of Uganda indicates that private sector credit has remained subdued, falling to 7.1 percent from 8.3 percent
The ratio of non-performing loans declined to 4.9 percent in the quarter ended June compared to 5.2 percent in March.
In its Monetary Policy Report for the period ended June, Bank of Uganda indicated that the decline was largely registered among shilling-denominated facilities for which non-performing loans dropped to 5.4 percent in June from 5.7 percent in March, but foreign currency facilities experienced an increase from 3.4 percent to 4.1 percent.
Overall, the highest rate of non-performing loans was observed in agriculture, trade, and business services, mainly due to the underperformance of the fishing, forestry, and restaurant sectors.
Data further indicates that private sector credit remained subdued in the three months to June, falling to 7.1 percent from 8.3 percent.
Bank of Uganda also noted that net credit extensions in the three months to June 2024 rose to Shs723.7b from Shs70.7b in March although this was skewed towards prime corporate borrowers.
Demand for and supply of credit rose to Shs5.7 trillion and Shs4 trillion from Shs5.3 trillion and Shs3.4 trillion, respectively, while the rate of approval rose to 70 percent from 65.5 percent.
However, demand is likely to remain low due to high lending rates and stringent supply-side conditions.
During the period, weighted average shilling and foreign currency lending rates rose to 18.1 percent from 17.6 percent, while the lending rate on foreign currency-denominated loans rose to 9.1 percent from 8.9 percent.
This was mostly pronounced in the manufacturing, housing, transport, and communications sectors, but a decrease was observed in agriculture, trade, and personal loans.
In the short term, lending rates are expected to remain elevated as private enterprises and households compete for credit with government.
Bank of Uganda also indicates that private sector credit growth was low across major economic sectors, particularly in agriculture, trade, housing, business services and personal loans. “The main reasons for the decline in agriculture were lower advances in production and marketing. The decline in credit growth to the trade sector was due to lower financing for retail, restaurants, and import credit. The slowdown in advances for housing was mainly due to lower financing for mortgages, land purchases and property development,” Bank of Uganda said.
However, Dr Kenneth Egesa, the Bank of Uganda director of communications, said the performance of the banking sector as of June, further improved, noting that risk in the sector had decreased due to stable economic conditions, and easing of the monetary policy, through structural and operational challenges such as deposit concertation and fraud have persisted.
He further noted that Bank of Uganda continues to closely monitor banking risks, while expecting credit growth and improvement in banking sector assets.
