Banks take gradual steps to risk-based lending

A customer is served at the Kenya Commercial Bank (KCB) in Nairobi on January 24, 2018. PHOTO | SIMON MAINA | AFP

Bank lending rates are yet to be fully adjusted in line with the risk rating of borrowers, with lenders adopting a gradual rollout to avoid shocking the credit market which is still recovering from the slowdown caused by the now repealed rate cap and Covid-19.

More than half of banks already had their risk-based models approved or signed off by the Central Bank of Kenya (CBK) by the end of July, allowing them to vary interest on credit according to the risk profile of a borrower, with an expected outcome of improved credit access across the economy.

By the end of June, 28 lenders had adjusted their overdraft, personal and business loan rates by between 2.4 and 4.8 percentage points from the March 2022 rates.

Some lenders charged as high as 16.4 percent for business loans in June, and 16.8 percent for overdrafts, while the rates on personal loans rose by up to 2.4 percentage points to 14.3 percent.

The increase is, however, likely to widen in coming months once they fully deploy the risk-based pricing model, especially on loans to small businesses that are deemed riskier borrowers compared to corporate organisations.

“The risk-based lending has not been implemented in full because you don't want to cause distress for customers. It will be implemented gradually,” said a bank executive who declined to be quoted.

Lenders had endured a prolonged wait for approvals — which according to the CBK was partly due to some submitting unsatisfactory plans — leading to most of them lending at a maximum of 13 percent even after the law capping rates on loans was lifted in November 2019.

They, therefore, largely resorted to pumping money into risk-free government securities at between 10 and 13.5 percent, which meant that growth in lending to the private sector remained below the pre-rate cap level of 8.3 percent until December 2021.

Lending to the private sector has been rising steadily this year, going from 8.8 percent in January to 12.3 percent in June, helped by higher demand for loans in transport and communication, manufacturing, trade and consumer durables sectors.

The expectation of the proponents of risk-based lending is that by being allowed to load a premium to cover lending to customers deemed riskier, banks will then open their wallets to small businesses and individuals, who have been struggling to access formal credit.

However, while there is an increase in approvals of risk pricing models, lenders have raised concerns that they still lack some of the supporting data necessary to accurately estimate a clients' risk profile due to the moratorium on negative listing of borrowers with loans below Sh5 million by credit reference bureaus (CRBs).

PAYE Tax Calculator

Note: The results are not exact but very close to the actual.