Central Bank of Kenya governor Njuguna Ndung’u. Consumer protection guidelines safeguard borrowers’ assets during sale of collateral security. FILE
What you need to know:
Central Bank of Kenya wants loans unpaid for more than 3 months classified non-performing.
Banks are feeling the heat of a new Central Bank of Kenya directive on the treatment of non-performing loans which has inflated their bad book and forced them to set aside additional cash as provision for defaults.
CBK now requires lenders to classify as non-performing all loan accounts of a borrower who defaults on the repayment of any one of their multiple loans for more than three months.
This provision saw banks’ bad loans for 2013 jump 30.9 per cent to Sh80.6 billion, the highest in over six years, even outpacing growth in new credit advanced by the lenders.
“The non-performing-loans (NPL) increased due to change of laws particularly relating to the recovery process, high interest rates in 2012 and introduction of CBK prudential guidelines regarding multiple mortgage facilities,” said Housing Finance CEO Frank Ireri.
Housing Finance’s portfolio of non-performing loans rose by 40.3 per cent to Sh2.2 billion last year.
Bank customers operate different loan accounts depending on the purpose for which the loan is taken, for example car loan or development loan.
Under the new requirements the car loan would have to be classified also as non-performing in case the development one falls into three months arrears.
The defaulting client would also have to repay all the arrears and consistently pay six monthly installments for all the loans to be reclassified as performing.
“If an institution has granted multiple facilities to a single borrower, and any one of them is non-performing, then the institution shall evaluate every other loan to that borrower and where necessary place such loans on non-performing status,” reads part of the prudential guidelines by the Central Bank.
Consumer protection guidelines safeguard borrowers’ assets during sale of collateral security, which lengthens the disposal to more than seven months. Banks, however, classify loans as non-performing after three months, a period shorter than the recovery process.
An increase in provision for non-performing loans results in the bank putting aside cash to cushion against possible defaults, cutting its muscle to grow business. Banks set aside an amount equal to loans that have not been serviced for over six months, termed as doubtful loans.
Over-stating profit
They have to set aside cash equivalent to 20 per cent of loans whose installments have not been paid for three to six months or sub-standard loans and three per cent of those that have not been serviced for between one and three months.
In the past analysts have accused the banking industry of under-stating their non-performing loans and under provisioning resulting in them over-stating their profits.
The rise in non-performing loans has also been attributed to high lending rates persistent since 2010. The rise in interest rates resulted in ballooning of monthly installments. The banks have been slow at dropping their lending rates despite signals from CBK to do so.
Bank credit managers also blamed the rising NPLs to delays by the government to pay State contractors’ bills.
The South Sudan conflict has also resulted in defaults, especially in the transport and construction sector, attributable to the attraction of Kenyan companies to the young nation.
A recent survey by CBK, however, revealed most banks expect non-performing loans to rise in the first quarter of this year driven by budgetary strains in households after the December festivities and January obligations.
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