Guarantors let off the hook over loan defaults

Loan guarantors have for now been let off the hook after the CBK revised regulations requiring them to be blacklisted for underwriting defaulters.

Guarantors had been put on the bad assets listing under the original regulations as they faced potential credit exposure, if required to repay amounts taken by delinquent clients.

The regulator said over 600,000 loan accounts had been forwarded to credit reference bureaus with most of them being of defaulters.

Only the Higher Education Loans Board (Helb) has forwarded positive information.

In 2011, the number of listed individuals and businesses stood at 213,000 indicating it has almost tripled.

“We changed that (listing of guarantors). We decided to let the market develop first,” said Mr Jared Getenga, the project manager of the Kenya Credit Information Sharing Initiative.

The regulations are yet to be gazetted, with Central Bank of Kenya governor Njuguna Ndung’u promising it will happen soon.

The banking industry is still sharing information on defaulters only, who are less than five per cent of the total industry borrowers, because regulations on how to share positive information are yet to be released despite changes in the Banking Act allowing for this.

Negative information has been useful to banks in loan recovery and improving their loan appraisal process and it has resulted in them requesting 2,907,375 credit reports while individuals have only made 41,681 requests.

Sharing of positive information would open the door for those who repay their debts to use their character to access negotiated terms of borrowing, which include lower interest rates and softened collateral demands. The industry expects the regulations to be passed next month.

Kenya Bankers Association (KBA) said that listing of a person did not lock them out of accessing credit but served as an alert to banks on how to treat them.

Some banks have, however, been denying those listed with the bureaus credit even after they clear their debts.

“The essence of information sharing was to ensure information symmetry—it should not be used to deny credit,” said KBA chief executive Habil Olaka.

Debt to income ratio

All credit providers in the country have merged under a new body which will see comprehensive information of borrowers shared across the financial landscape, allowing the institutions to make informed decisions.

The Association of Kenya Credit Providers will include banks, micro finance institutions, Saccos, Helb, telcos and utility companies.

The comprehensive data will help credit reference bureaus to analyse an individual’s credit and give them a rating. The credit score ranges between 100 and 900, with a score of between 100 and 400 indicating that the individual has defaulted in a payment in the past.

A score of 401 to 600 is considered fair, which indicates that one has not defaulted but their ratio of debt to income is considered high.

A score of 700 to 800 is considered good while above 800 is excellent mainly based on prompt payments and long credit history. A person who has no credit record is not scored.

Banks are seeking to have large corporations also rated based on whether they pay for goods and services delivered to them by Small and Micro-Enterprises (SMEs) on time. Banks said SMEs were sinking into debt because the government and blue chip companies were holding up their funds.

Equity Bank attributed its growth in non-performing loans in June to delayed payments of SMEs by the government.