Kenya Bankers Association CEO Habil Olaka (right), Finance minister Uhuru Kenyatta (centre) and Central Bank governor Njuguna Ndung’u address a news conference on the restructuring of loans at the Treasury Building in Nairobi yesterday. Banks have been pressed to ease the burden of loan repayments for borrowers. PHOEBE OKALL
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.
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.
Lending rates shot up by at least 10 percentage points between July and November, trailing the steep rise in the Central Bank Rate (CBR) from 6.25 per cent to 16.5 per cent.
Banks promised not to raise interest rates for existing borrowers after last week’s 1.5 percentage points rise in the CBR to 18.00 per cent.
New borrowers, however, face the possibility of being charged a higher rate.“Banks will absorb this increase and mitigate the additional burden on existing borrowers,” said Richard Etemesi, the chief executive of Stanchart.
“This will, however, apply only to existing borrowers and does not include interest rates for new loans.”
A capping of interest chargeable on existing loans when the cost of deposits is rising means a big squeeze on commercial bank profits – at least in the medium term.
Tight liquidity, caused by CBK’s recent decision to increase the rate at which it lends to banks and the rise in cash ratio or money that the banks must keep with the regulator to cover their operations, has seen deposit rates rise from an average of 3.5 per cent in April to 8 per cent currently.
“Since interest rate adjustments may precipitate mass loan defaults, banks will absorb some of the additional costs arising from changes in the macroeconomic environment to the extent possible without threatening their viability,” Mr Etemesi said in the statement read for him by Habil Olaka, the chief executive of the bankers’ lobby.
“This entails sacrificing a portion of their budgeted profit margin.”
Mr Olaka said a high interest rates regime presents the banking system with three major challenges including the risk of mass default, increase in non-performing loans and a slowdown in investments.
KBA said banks had in the recent past increased lending rates in reaction to the current economic environment where high inflation had forced the CBK to tighten monetary policy.
The CBR stands at 18 per cent, but the interbank rates have risen to more than 20 per cent and even touched a high of 35 per cent. Yesterday, the discount window stood at 24 per cent while the T-Bill rates were barely shy of the 20 per cent mark.
“Whereas it is imperative that the rise in inflation be addressed by tight monetary policy, it is also critical that loans already contracted continue to be serviced and remain affordable to sustain investments and reduce the risk of default,” said Mr Etemesi.
KBA had taken cue from the Monetary Policy Committee (MPC) which at its December 1 meeting raised the CBR to 18 per cent citing inflation pressure as the main driver of the policy action.
Mr Etemesi appeared to have read from this script earlier when the bank increased its lending rates but extended the repayment period to enable borrowers to absorb the extra interest repayments.
Diamond Trust Bank chief finance officer Alkarim Jiva said the bank had taken a flexible approach to loan repayments to ease the burden on borrowers.
Yesterday, CBK governor Njuguna Ndung’u described the prevailing economic difficulties as temporary, saying they are part of the troughs and crests in growth.
“We believe that the funds we have received from the IMF will help as we confront the supply shocks which were beyond our control and we have seen a gradual return to exchange rate stability,” said Prof Ndung’u.
The shilling strengthened yesterday to trade stronger than 89 per dollar for the first time since July 6, helped by dollar inflows from the tea and horticulture sectors.
Commercial banks quoted the shilling at 88.80/89.00 against the dollar, stronger than Friday’s close of 89.30/50.
Uncertainty has been rising over the repayment of existing loans in the past three months of steep rise in interest rates.
The surge began as the mountain of NPLs dropped to a 10-year low of 4.8 per cent in September.
Prof Ndung’u and Mr Kenyatta were, however, non-committal on additional measures that CBK had agreed to take in response to the concessions from KBA.
Prof Ndung’u would not discuss whether the monetary authority had promised to ease any of the administrative measures – such as forex exposure limits – taken earlier to stop commercial banks from speculating in the currency market.
