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NAIROBI, April 4 (Reuters) - Kenyan lenders look set to chalk up more bad debts after they ticked up last year as higher rates bit and payments were withheld from government contractors during the east African country's political transition.
But the short-term pain may herald long-term gain as another factor has been added to the bad loan mix - stricter enforcement by the central bank of its own prudential rules.
This holds out the promise of greater transparency as investors will obtain a more accurate view of the state of the books and the quality of bank debt.
"It will be very clear when looking at the numbers that these are the true numbers of non-performing loans, and therefore when reviewing a bank you can take a bolder position," said Francis Mwangi, an analyst at Standard Investment Bank.
He also said a more no-nonsense enforcement would help ensure banks are more prudent when it comes to lending. "Much more importantly, it means banks have to be watchful about their lending practices."
Kenyan lenders reported 80.6 billion shillings ($932.33 million) in non-performing loans last year, 5 percent of total lending, up from 4.7 percent in the previous year, according to the central bank.
Analysts said the data, although no cause for alarm, opened the banks up to increased scrutiny, after five years of stellar growth in which some lenders doubled their loan books.
"It is something that one needs to continue assessing especially as credit is picking up," said Ragnar Gudmundsson, the International Monetary Fund's representative in Kenya.
Bankers partly blame the stricter application of central bank rules on debt tolerance for the rise in known bad debts.
Joshua Oigara, chief executive of KCB Bank, and his counterpart at Equity, James Mwangi, said they were now required to write back distressed loans once they had been serviced for six months, up from a period of three in the past.
Other sources in the banks who did not wish to be named said what had really happened was that the central bank had started ensuring that rule, which was always on the books, was now being followed more closely.
The end result will be a rise in bad loans - or a more accurate reflection of the situation. "(Bad debts) are obviously going to grow because of the new regulations," said Ochieng Oloo, publisher of Kenya's annual banking survey.
Central Bank Governor Njuguna Ndung'u said the rule on reporting of bad debts was always contained in the prudential guidelines, declining to comment on whether enforcement had been stepped up in 2013.
Tighter regulations or stricter enforcement compounded the trailing effects of the country's macro-economic shocks of 2011, which sent commercial rates rocketing past 25 percent, and the impact of a political transition after elections in March.
KCB, which is the largest lender by assets in East Africa's largest economy, said its non-performing loans jumped to 8.1 percent last year from 6.7 percent.
Equity, ranked as the biggest bank by the number of depositors, saw its bad debts jump to 5.19 percent from 3.1 percent in the previous year.
Oigara said some KCB customers faced difficulties after government payments were delayed by several months.
The outgoing government of then-president Mwai Kibaki stopped paying contractors well before the March 2013 election to prevent irregularities - such as payments for goods never supplied - while attention was diverted by the transition.
President Uhuru Kenyatta took several months after his April swearing-in ceremony to form a proper government, meaning contractors were only paid in the fourth quarter.
The delays had a knock-on effect on the sensitive building and construction sector, Oigara added.
Executives in the industry said they were hopeful their bad debts would start to fall with this chapter behind them.
"By June, we are very confident that NPLs will come back to around 4 percent or below 4. Most of them have started performing but we are unable to mark it as performing because we have to wait for six months," Mwangi, the CEO of Equity, said.
He said he expected the bank to close this year with bad debts at the traditional level of around 3 percent.
Oloo, the publisher of the banking survey, cast doubt on this sort of benign forecast. "With the high interest rates that were there, there is a pack of non-performing loans that many banks are holding at the moment and it will take a while before banks are able to get them out of their books."
Habil Olaka, chief executive of the Kenya Bankers Association (KBA), defended the lenders, saying there was no cause for concern. "We haven't even developed a trend yet," he said, adding the numbers were for just one year.
He also blamed the rise in bad debts on banks diversifying to tap into high-yield segments like lending to small and medium enterprises (SMEs) "where the real opportunities are".
"The downside is that you are bound to incur more exposure to credit risk," he said.
KCB has been shifting to lending to SMEs and consumers in a bid to diversify its loan book, which is traditionally focused on big firms who borrow in dollars and pay low interest rates.
$1 = 86.4500 Kenyan Shillings Editing by Ed Stoddard and Mark Heinrich