Commercial banks are shunning forceful auction of property seized from loan defaulters in favour of private settlement after Kenya’s soft economy slashed asset prices below the minimum bid value set in law.
Under private treaties, distressed borrowers agree with banks to look for the best available price for their properties and sell to repay loans as opposed to relying on the auctioneer’s hammer.
The move has given banks room to get around the Land Act 2012, which bars them from auctioning seized assets at below 75 percent of the prevailing market value.
Sluggish economic activity, which has worsened in the wake of Covid-19, 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 due to the minimum bid price, 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.
Lenders are now shifting to private treaties to cut the glut of repossessed properties, stepping back from the industry norm where auctioneers forcefully seize assets for public sale.
Bank chief executives reckon that few takers have offers that match the reserved bid prices, prompting expensive repeat advertisements for property auctions and high storage costs.
Stanbic Bank #ticker:CFC Kenya CEO Charles Mudiwa said that the hitch brought home by the reserve price law has forced lenders to increasingly turn to private treaties.
“With these restrictions, we have found ourselves unable to dispose of assets over a longer period, which is very expensive to the bank. We are now actively pursuing private treaties as it has several benefits,” said Mr Mudiwa.
“Higher sale prices are attained as we are not selling under duress and it is also much cheaper since it cuts out costs associated with lawyers and auctioneers.”
Lenders also say private treaties help them retain relationship with customers as opposed to the animosity that comes with forced auctions.
Non-performing loans in the banking industry rose to Sh377 billion in May, up from Sh210 billion in January 2017, reflecting a jump of 79.5 percent.
Banks have in recent years stepped up debt recovery efforts to clean up their loan books, leading to an increase 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 carrying auction notices reflects the jump in asset seizures.
A top bank CEO who spoke on condition of anonymity said auctioneers had also not been transparent in the bidding process.
“Many auctioneers have made this a ‘Wild Wild West’ process. Rigging of bids happens a lot as they seek to get extra money from the winners of bids and so private treaties are gaining relevance,” said the banker.
“An auctioneer will, for instance, say the best bid on a one-year-old Mitsubishi Fuso truck is Sh960,000 yet when you advertise directly as a bank you get deals in the region of Sh2 million.”
The mounting defaults are a reflection of the struggles that borrowers are going through in an economy that has witnessed a string of job losses in recent months across nearly all sectors as companies intensify austerity measures to protect their profits.
The job cuts and the worsening business environment for firms are linked to the measures enforced to curb the spread of Covid-19. This has seen workers who took loans on the strength of their pay slips default. The slowdown in real estate is hurting property developers who are finding it difficult to sell houses that were built on mortgage loans. Small businesses hit by lower sales have been forced to close shop, with many of them defaulting on their loans.
HF Group managing director Robert Kibaara told the Business Daily that Covd-19 had led to a drastic decline in real estate and the lender had stepped up use of private treaties to handle distressed borrowers.
Mr Kibaara said that applying reserve price laws in the current depressed market had led to many stalled sales.
“The private treaty is not subject to the requirements of the Land Act. It only has to be that the customer is willing and is possibly represented by a lawyer so that we enter an agreement,” said Mr Kibaara.
Bankers have been pushing 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 25 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.