Thousands of consumers who did not formally close previously held bank accounts have been included in the list of bad borrowers, adding a new twist to commercial banks’ use of credit reference in the lending market.
The lenders said the consumers are being penalised for maintaining negative bank balances that add up to loan defaults, qualifying them as bad borrowers in the credit market.
Also included in the list of bad borrowers are bank customers who have applied for credit cards but have not activated them — making it impossible for the banks to recover the initial cost.
Kenya launched the credit referencing system last year to profile borrowers based on their loan servicing history as well as their dealings with utility companies such as water and electricity distributors.
Some commercial banks acknowledged encountering similar problems when evaluating their clients for loans and advised them to clear with the banks that shared negative information before continuing with negotiations.
“People have been put there unnecessarily. Some credit officers in the industry think CRB is a correctional measure for all that has gone wrong in the past but that is not the case; it is worse because it denies one access to credit,” said Jacob Ogola, head of credit administration at Commercial Bank of Africa.
Banks have been increasing their reliance on credit reports with most demanding that all loan applications be accompanied by findings of the individual’s or business report.
The latest Central Bank quarterly report indicates that commercial banks had requested 1,060,865 credit referencing reports by end of September.
“The reports are now part of our credit appraisal process and negative listing is considered on a case by case basis,” said Suprio Sengupta, the general-manager at I&M Bank.
“For personal financing, it becomes crucial but on secured loans it is negotiable,” he said.
The credit referencing guidelines for the banking industry indicate that lenders are expected to put more emphasis on each borrower’s character than their ability to repay or even to raise collateral.
The CRB report is deemed to reflect the borrower’s character.
Credit reference bureaus admitted receiving consumer complaints over dormant account-related blacklisting but said commercial banks had submitted the information to the bureaus.
“We are aware of cases where a customer left his or her account dormant and it went into negative balance not necessarily because of failure to service a loan but for overdrawn bank charges,” said Sam Mukoko of Metropol CRB.
“This is the group of customers who are being taken by surprise when they apply for a loan.”
Wachira Ndege of CRBAfrica, one of the first credit reference bureaus to get Central Bank licensing, said such surprises should not occur as commercial banks are expected to inform a person of his/her listing in the bad borrowers’ book within 30 days of registering a person as a defaulter with the credit bureaus.
Mr Ndege said the requirement is expected to elicit a response from the listed borrower and set in motion a process to correct any errors in the report.
“A customer can also request their status report and if there is any error a resolution procedure is in place,” said Mr Ndege.
An individual is entitled to one free report in a year and to a free copy of the report within 30 days of being notified of their listing.
Mr Wachira said that the law only provided for listing of individuals on the basis of outstanding debt obligations on a facility and not as a result of bank charges.
Mr Mukoko said that customer complaints had led some banks to write special letters to the bureaus asking them to review the status of the complainants.
CRB stands as one of the most outstanding banking sector reforms in Kenya for its provision of credible information on customers that has helped improve the quality of loan books.
Kenya’s stock of gross non-performing loans (NPLs) declined by one per cent in the three months to September to stand at Sh57.7 billion.
Similarly, the ratio of gross NPLs to gross loans improved from 5.4 per cent in June 2011 to 4.8 per cent in September 2011 — a development that has been partly attributed to the use of the credit reference mechanism.
“The reduction in non-performing loans is attributed to enhanced appraisal standards deployed by banks,” read the Central Bank’s report.
“Someone who has been listed cannot get a loan until they clear with the CRB first,” said James Mwangi, CEO of Equity Bank.
Blacklisted consumers are considered to be of higher risk and can be charged a higher premium than other borrowers. On the other hand, borrowers with a good repayment history are expected to use their rating to negotiate better interest on their loans as they are perceived to bear a lower risk of default.
Evidence from the lending market, however, indicates that no lender has used the credit reference information to vary interest rates for their customers though the bad book is being widely used to deny consumers access to credit.
Some lenders also responded to the bad ratings with requirements that the borrowers raise more collateral for their loans even when they have been cleared by institutions that had listed them.
It remains each bank’s prerogative to determine the amount of risk exposure it is willing to take but most have chosen to simply reject loan applications from such customers.
Before listing a person, a bank is required to give a 30 days’ notice for the individual to take corrective measures.
But once listed, even if a person clears the debt for which they were listed, their names remain in the bad register for seven years.
“Some banks are denying these people credit and that should not be the case,” said Mr Ogola.
“They should instead be priced higher and be required to settle the loan for which they were blacklisted before disbursement of the new loan.”
Mr Ogola said the law gave the allowance in recognition of the fact that conditions in a client’s life at the time of default may have changed, placing them in a better position to service a higher loan while offsetting the previous one.
Staff turnover in the industry was also cited as necessitating further investigation into historical information in an account for a comprehensive reconciliation before listing.
Industry insiders also blamed lack of public awareness and the failure by customers to challenge the banks for the casual manner in which the lenders are using the credit reference information.
Closing their accounts
Mr Ogola advised borrowers to follow due procedure in closing their accounts instead of leaving them dormant even where they felt aggrieved.
Initially, those who were locked out by the banks could turn to microfinance institutions but in his Budget speech in June, Finance minister Uhuru Kenyatta sought to have the MFIs included in the information-sharing platform.
Other service providers including the Nairobi City Council have sought to be included in the credit referencing – especially aiming to list land rates defaulters.
The Higher Education Loans Board is already using the services of the bureaus.
The industry regulator hopes that the goodwill of non-defaulters would not only attract lower cost of credit but also eliminate the need for collateral, making it easier to deepen financial inclusion.