Politics and policy
Treasury’s loan servicing deal staves off risk of mass default
Thousands of borrowers took advantage of the soft repayment terms that the Treasury negotiated with commercial banks to reschedule their loans, easing a servicing burden that came with the sharp rise in interest rates at the end of last year.
More than 440,267 borrowers with loans worth Sh98.9 billion extended their repayment period, offsetting the impact of the sudden rise in interest rates and staving off a looming rise in the pile up of non-performing loans (NPLs), according to a survey by the Kenya Bankers Association of 35 lenders.
“It is encouraging that customers took advantage of the offer and helped us to lower the level of default risk in the market,” said Habil Olaka, the KBA chief executive.
The survey found that interest rates on 7,426 loans valued at Sh51.9 billion were capped as per the agreement.
Though borrowers ultimately pay back much more than they anticipated while signing up for the loans, extending repayment period, also known as extension of the loan tenure, keeps the monthly instalments even helping them sidestep a disruption of their personal finance plan that pushes many into default.
The Monetary Policy Committee (MPC) had in January signalled that the threat of default that loomed large after it jerked up interest rates in the final quarter of last year to cushion a battered shilling had subsided leaving a policy headroom that enabled them to leave the base lending rate unchanged.
“The threat of accumulating non-performing loans is negligible with notable progress made by banks towards cushioning borrowers from high interest rates,” said the MPC report that informed its decisions early this month.
The report indicated that net NPLs ratio (a quotient of the banks’ exposure to their total lending) had declined to 1.5 per cent in December from 1.8 per cent in October pointing to adequate provisioning for losses and minimal risk of default.
Treasury struck a deal with commercial banks to extend loan repayment periods, waive early loan repayment charges, and cap the rise in monthly instalments to a maximum of 20 per cent to ease the burden for borrowers.
Credit officers said most banks had opted to extend the repayment period of check-off loans (debts whose monthly repayment portions are taken directly from the payroll and remitted in bulk to the lender to avoid the administrative hassles that come with review of the instalments.
The banks also responded to the reality of higher instalments raising default risk levels especially for workers whose salaries had not been reviewed to accommodate the higher payment portions.
Though the banks had agreed the measures with Treasury, it was upon the borrowers to negotiate the revised terms with the lenders.
The KBA survey found that the banks waived charges on 1,210 loans valued at Sh237.9 million and phased out additional charges and commissions categorised as miscellaneous on 56 loans valued at Sh1.4 billion.
The lenders ordinarily fine their borrowers for clearing loans earlier than agreed arguing that the move distorts product profile and prevents the bank from realising the full benefits of the loan as agreed at the onset.
Lending rates shot up by at least 10 percentage points between July and November last year, tracking the steep rise in the Central Bank Rate (CBR) from 6.25 per cent to 18 per cent.
The survey further reveals that 1,273 loans totalling Sh879.4 million did not attract interest under the In-duplum rule.
The rule demands that interest accruing on any loan that is not being serviced is capped when it equals the outstanding principal at the time of default.
KBA said all banks had implemented the measures that are expected to remain in place till interest rates start declining.
“As long as the CBK’s tight monetary stance remains we will maintain the measures,” said Mr Olaka.
The MPC expects lending rates to remain high in the short term but to decline with inflation towards the end of the year. The committees’ own survey showed that 45 per cent of banks expected the rates to go down during the year while 36 per cent expect them to rise.
The steep rise in interest rates has attracted the attention of members of parliament who have since December been pushing for the passing of a law to tame the banks.
The battle between Treasury and parliamentarians over the interest rates forced parliament to go on December recess without passing the Finance Bill leaving freezing some of the fiscal measures in the budget.
The momentum for an easing of the interest rates seems have spilled into the new year with the parliamentary committee formed to probe the depreciation of the shilling also delving into the issue.
“The current interest rates of slightly over 30 per cent charged by banks are unrealistic, harmful and untenable.
Therefore, the Government, CBK and financial market players should put in place deliberate mechanisms to reduce the interest rate to affordable rates within three months of adoption of this report by the House,” states the committee report.
The banks have opposed the legislative regulation arguing that it would lead to exclusion of persons at the lower end of the pyramid following their high credit risk premium which may not be accommodated within the recommended limit.
The measures apart from shielding them from deterioration of their loan books may also be guided by the need to show that they are considerate of the borrowers not necessitating legislative control.