Reserve price law stalls loan default auctions

Commercial banks are struggling to auction multi-shilling billion properties seized from loan defaulters with potential buyers hesitating to pay above the minimum bid price set in law.

Sluggish economic activity has created a growing pool of distressed borrowers whose assets are being seized by newly aggressive lenders.

But the auctioneers are not selling as fast as they are repossessing them, leaving a glut of repossessed vehicles, land, houses and office equipment as cash-strapped buyers seek to buy the properties cheaply and at outsized discounts.

The preferred discounts have not been possible due to the Land Act 2012, which bars banks from auctioning seized assets at below 75 percent of the prevailing market value.

NCBA Group #ticker:NIC Managing Director John Gachora reckons that few takers have offers that match the reserved bid prices, prompting repeat advertisements for property auctions.

“The problem is that nobody is offering 75 percent so we keep advertising, but we are not selling. So someone is sitting on money, but can’t buy because the price is up,” said Mr Gachora.

“Today, those who have money are sitting on it and those with assets are sitting with them. We are looking at each other. Only lawyers and auctioneers are making the money. We must find ways to make the two parties to think,” he added.

Non-performing loans in the banking industry rose to Sh347 billion in October up from Sh210 billion in January 2017, reflecting a jump of a 65.2 percent.

The mounting defaults in the property market are a reflection of the struggles that bank loan holders are undergoing in an economy that has witnessed a string of job losses in recent months across nearly all sectors as corporates intensify austerity measures to protect their profits.

This has seen workers who took loans on the strength of their pay slips default with the slowdown in real estate hurting property developers who are finding it difficult to sell units that were built on mortgage loans.

Small businesses have also suffered from delayed payments for their services by both the national and county governments, forcing some to close shop as others default on their loans.

Banks have stepped up debt recovery efforts to clean up their loan books, leading to a spike in property seizures by the aggressive lenders.

Many banks do not disclose the exact number of properties they have seized from defaulters. But the sharp increase in the number of newspaper pages running auction notices reflects the jump in asset seizures.

Stanbic Bank disclosed that it had seized customers’ assets valued at Sh381.88 million last year over unpaid loans.

This was a 33.7 percent increase from the previous year’s Sh285.6 million showing increasing debt distress.

Auctioneers reckon that they held more auctions in 2019 compared to 2018 that were linked to defaults, arguing that banks were moving much faster to seize properties from defaulters since the legal cap on lending rates was put into place in September 2016. The cap was removed last month after it stifled credit growth.

But there was a glut in the market of repossessed houses and office blocks, said Joseph Gikonyo, the managing director of Garam Auctioneers.

“The bad economic environment has made it difficult to get buyers even for property being put up for auction,” said Mr Gikonyo. “The uptake has been lacklustre despite the rise in auctions.”

While the Kenyan economy expanded 6.3 percent last year from 4.8 percent in 2017, private sector activity—which translates to jobs and higher pay-- has remained muted.

The reduced credit growth also made it difficult for lenders to refinance seized assets.

Mr Gachora wants banks to be allowed to sell assets at a price that reflects the present economic realities and not the legally set reserve price.

Section 97 of the Land Act 2012 requires banks to exercise duty of care on the reposed properties and empowers defaulters to sue if their assets are sold off cheaply.

“If the price at which the charged land is sold is twenty-five per centum or below the market value at which comparable interests in land of the same character and quality are being sold in the open market----the person whose charged land is being sold for that price may apply to a court for an order that the sale be declared void,” states the Act.

Mr Gachora wants the law to be amended or the creation of a State-backed asset management company that will shoulder the difference between what potential buyers are demanding and the valuation of the distressed property.

“If the buyer in the market takes at say 10 percent below the required minimum price, government should take that hit and give a very long term loan to the owner of that asset to repay over time,” advises Mr Gachora.