Inquiries for borrowers’ profiles from credit reference bureaus (CRBs) hit a record 39.8 million last year as lenders intensified scrutiny to reduce the mounting loan defaults.
Data from the Central Bank of Kenya (CBK) shows that the requests jumped 28 percent from 30.2 million a year earlier when loan defaults surged by Sh90.8 billion amid Covid-19 economic hardships.
During the review period, the CBK had barred unregulated digital mobile lenders from forwarding the names of loan defaulters to CRBs and stopped the blacklisting of borrowers owing less than Sh1, 000.
It also barred the CRBS from sharing negative information with banks for loans of less than Sh5 million that were defaulted after October 2020.
The increased request for the credit reports came in a year when Kenya’s economy rebounded to grow at the fastest pace in 11 years on easing of Covid-19 restrictions.
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The heighted scrutiny helped banks lower defaults, with bad loans growing Sh2.1 billion last year.
“2020 was the year of lockdown hence massive reduction in economic activities. This naturally led to reduced demand for credit, then 2021 was in a way a year of recovery,” StanChart CEO Kariuki Ngari said.
The data shows that last year’s requests to CRBs represent slightly above a third of the total requests separately made by banks and individuals since 2015.
Banks made 38.6 million requests for information on borrowers, which is 32 percent of the 120.54 million requests made by financial institutions from 2015 to 2021.
Requests for credit reports from individuals grew 29.5 percent to 1.15 million last year as more borrowers sought their own credit scores, particularly in compliance with requirements for job applications.
Most employers demand CRB clearance from job seekers.
Last year’s requests by individuals represent 37 percent of the 3.1 million requests made since 2015 as more Kenyans take advantage of the entitlement to one free credit report a year.
Kenya suspended for one year a move to blacklist borrowers with non-performing loans of less than Sh5 million at the start of October 2020 in an effort to help small and medium-sized businesses.
The suspension, which took effect last October, is one of a series of measures that President Uhuru Kenyatta announced to boost the economy as it recovers from the effects of Covid-19.
The CBK said the measure would stay in place until September 30, 2022.
The suspension restricts banks from using defaulters’ data to deny millions of Kenyans additional loans to grow their businesses or for projects.
It remains to be seen how the freeze will affect requests for borrowers’ profiles from the CRBs this year.
The CBK had warned that commercial banks could restart rationing loans following the suspension of blacklisting of such defaulters.
“The suspension could adversely impact the provision of credit by banks to the target (MSMEs) group as they will be unable to distinguish between the good and bad borrowers during the suspension period,” said the CBK earlier.
Bankers also said a lack of credit reference information could contribute to soaring costs of loans and stall lending to businesses due to incomplete borrowers’ information.
Borrowers reported to one of Kenya’s three CRBs jeopardise their chances of being given more credit. The share of loan defaults has increased to a one-year high, pointing to a cash crunch in the economy that could set up thousands of borrowers for property seizures.
The latest CBK data shows that 14.1 percent of all loans were defaulted by end of April, the sharpest 12-month increase over a year.
The stock of bad loans had risen to Sh473 billion in March this year. The share of loan defaults had dropped to 13.1 percent in December but has since been rising. Banks that had gone slow on property seizures last year following the pandemic could now be forced to step up debt recovery efforts to clean up their loan books, in what could lead to a spike in auctions.
The CBK says the defaulted loans are mainly in the building and construction, manufacturing and trade as well as transport and communication sectors, signalling that firms and individuals who had taken new loans on the strength of increasing cash flow with the reopening of the economy are struggling to service their loans.