Banks should be patient with first-time defaulters

Last November, Josephat lost his job while repaying a bank loan he had taken two years before for his Master’s degree studies.

In March, when the interest rates were reviewed upwards in tandem with the Central Bank Rate, he had to stop repayments because the monthly rates were beyond his means. Josephat’s priorities changed and the basics were the focus until getting another job.

His credit information was forwarded to the credit reference bureaus as a precaution to would-be lenders.

Josephat in this story could be anybody out there. We want to use this case this week to analyse the predicament of first-time defaulters, including the beneficiaries of the all-important study loans by the State agency Higher Education Loans Board (Helb).

Traditional approaches to consumer lending have continued to mislead financial institutions, especially banks to solely focus on those who have never defaulted or not been reported to the credit reference bureaus. Banks have relied on the people with clean history to grow their loan books.

 Somewhat most of these lenders believe that all defaulters whose names are with the credit risk analysts pose long-term risks. Surprisingly, majority appear to be first-time defaulters.

 The recent review of interest rates by commercial banks after the Central Bank of Kenya moved to tame the rising inflation posed a major crisis to many borrowers just like Josephat.  

 Many could have defaulted because of the changes that may have affected all and sundry, including some for the first time, forcing shelving debt obligations to focus on basic needs first and foremost.

 But banks can benefit from the list of people affected thus and growth their loan books especially in the wake of intense competition.

 But one would ask, “Why would a lender focus on first-time defaulters who have exhibited characteristics of ‘uncreditworthiness?’”

 Unlike serial defaulters who pose a credit risk to most lenders, first-timers like Josephat have the potential of improving their financial standing.

 In addition, they are extremely optimistic about their financial future and subsequently their propensity to seek out loans in the future makes the segment even more attractive than those who have never been reported to the credit reference bureau.

How then should a lender court first-time defaulters to grow their loan books?

Deleting the default information from the credit bureaus upon settlement of a debt as proposed by the Finance minister Njeru Githae is not a feasible approach.

Where a borrower has defaulted on their loan obligations for three months, the lender will submit the information also termed as negative information to a credit reference bureau for sharing among lenders.