CBK extends credit listing rule to nab loan guarantors
What you need to know:
Though CBK does not keep track of the number of persons listed with the bureaus, a research by Financial Sector Deepening (FSD) indicates that over 213,000 people had been listed with the bureau by April, 2011.
Borrowers face a new hurdle in accessing bank loans from next month if a Central Bank proposal that guarantors who fail to service facilities in default be referred to credit reference bureaus is adopted.
The proposal due to be discussed by stakeholders on December 14 means that if A had guaranteed B for a loan and B is unable to pay, A will be required to start paying the loan within three months of B defaulting, including a notice period of one month.
If the guarantor is not in a position to service the loan within that period, the Central Bank proposes that the entry be listed with the credit reference bureau as a default, limiting guarantors’ ability to access credit.
“The guarantor’s credit information will be forwarded to all bureaus if the loan is not returned to a performing status,” says the rule proposed by the banking regulator.
However, the guarantor’s information would not be submitted to a bureau if that of the borrower has not been referred for blacklisting.
The new regulations are open for public debate till mid next month before they come into law but they portend complications for borrowers as well as banks, which rely on third parties either for collateral on loans or as character witnesses of borrowers.
Though credit is being advanced increasingly on cash-flow considerations, banks often fall back on guarantors to hedge their bets because many borrowers lack assets that can be charged as securities.
Land title deeds, shares of listed companies and vehicle logbooks are the most common forms of acceptable collateral.
The introduction of the new rules is, therefore, likely to hurt access to credit as people are expected to be more discretionary in offering their support to borrowers.
“People will be extremely cautious on who and under what circumstances they guarantee. The use of guarantors as a backdrop will decline,” said Sam Omukoko, the managing director of Metropol Credit Bureau.
Banks usually also assess a guarantor’s ability before accepting them to be sure they can recover the cash even when the principal is unable to repay the loan.
Lenders have in the past relied on deducting the defaulted amounts from cash held by the guarantors or selling off assets that had been deposited by the guarantor as their commitment.
“When somebody defaults, you the guarantor, step into their shoes in all aspects,” said Habil Olaka, the CEO of the Kenya Bankers Association.
Guarantors will be given the right to access credit reports of the principal borrowers, enabling them to identify their financial commitments with other institutions and their credit worthiness before committing themselves.
Upon default, the lender would give the guarantor 30 days to engage the borrower. On expiry of the first notice without any action, the bank would issue a 60-day notice, telling the guarantor to regularise the account. Failure to do so would lead to the listing with the credit reference bureaus.
Mr Olaka, however, said the rule would not impact on the volume of such loans as the existing guarantors are expected to be committed to repaying the full amounts in case of defaults.
Banks would also be sharing information on the guarantors even when sharing positive information about their borrowers, a move that may negatively impact the credit rating of persons who underwrite others.
“If you guarantee more than two parties without supporting assets then it brings the question of to what extent are you able to meet your responsibilities?” said Mr Omukoko.
Information released to the bureaus is usually used to rate a person’s ability to meet their financial obligation with positive information giving one a high score that results in relatively lax requirements during loan appraisals or lower cost of lending compared to high risk borrowers.
The new rules have also allowed banks to share positive information, a policy meant to reward loyal, debt payers.
To open up access to the credit reports, the bureaus have also been given mandate to look for agents who would be used to distribute the reports. Currently, a person has to visit the offices of the credit bureaus which are in Nairobi to access the report.
Credit bureaus have in the recent past been challenged in court for holding false information now have some reprieve as banks are required to communicate with the borrower before submitting their details with the bureaus. The notification will contain the particulars of the loan, including the original amount, interest rate charged, principal amount paid, interest paid and the outstanding amount including any penalties charged.
Banks have been relying on the credit bureaus to lock out serial defaulters who have previously been blamed for the high cost of lending in the country. When one is listed with the bureaus they remain blacklisted for a period of seven years even when they clear the outstanding amount.
Negative information
Apart from banks, other institutions with the mandate of submitting negative information include saccos, deposit-taking micro-finance institutions and amenity companies such as Kenya Power and the Nairobi Water and Sewerage Company.
Though CBK does not keep track of the number of persons listed with the bureaus, a research by Financial Sector Deepening (FSD) indicates that over 213,000 people had been listed with the bureau by April, 2011.
Banks had resorted to denying those blacklisted loans, locking them out of credit instead of charging them more to cater for their considered higher risk.
