Treasury moves to stave off mass loan defaults

The Treasury on Tuesday strong-armed commercial banks into easing the burden of loan repayments for borrowers in a pre-emptive move aimed at staving off possible mass loan defaults in the wake of a recent increase in lending rates.

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At a press conference curiously held at Treasury Buildings, commercial banks announced that they had capped any increments in monthly loan repayments at 20 percentage points above the applicable rates and extended the period borrowers would be required to service their loans.

The move means that monthly repayments for a borrower who took a loan of Sh100,000 to pay for 18 months at a monthly rate of Sh7,000 can only rise to a maximum of Sh8,400 and any amounts above the capping serviced over an extended period of repayment.

Finance minister Uhuru Kenyatta, who sat in the Kenya Bankers Association (KBA) press conference, said the measures were taken to cushion borrowers from high interest rates and the difficult economic conditions, which he described as temporary.

“We understand these to be short-term shocks but the measures we are taking are intended to ensure minimal adverse effects on borrowers and the economy,” said Mr Kenyatta.

But economists argued that the offer may be a signal that the Central Bank of Kenya is planning to tighten monetary policy further.

“Many will think, well, if they are capping the increase in loan repayments, maybe they are planning to hike further,” said Razia Khan, StanChart’s head of research for Africa.

She said there was no “strong case for further CBR increases” and predicted that there was likely to be easing in the second half of the coming year.

“It reinforces our belief that appreciation of the Kenyan shilling is likely to have an impact on inflation in the coming months and that we have most likely seen a peaking of the policy rate.

We think that there is a strong likelihood that the CBR will be held steady at 18 per cent,” she said.

The Kenya Bankers Association (KBA) said its members had agreed on the measures to curb possible defaults and an increase in non-performing loans in an environment of high interest rates.

“Banks will cap the increase in the instalment repayment to a maximum of 20 per cent of the current level of instalment.

The instalment will then be spread out leading to extension of the repayment period,” said a statement from KBA.

The banks also accepted to waive penalties for early repayment of loans, an offer that should encourage borrowers to pay early – effectively increasing the liquidity of banks and relieving borrowers from paying higher interest rates.