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IMF warns against easing classification of bad loans

Central Bank of Kenya
Central Bank of Kenya building in Nairobi. FILE PHOTO | NMG 

The International Monetary Fund (IMF) has warned against easing the criteria for classifying bank loan performance even as authorities up measures to cushion both borrowers and the financial sector from the coronavirus pandemic.

The multilateral lender said changing the criteria would end up compromising transparency that would normally ensure accuracy and reliability of the data obtained from the financial sector.

Currently, loans are classified as 'normal' when they are performing according to a bank's expectation, 'watch' if a term loan is due and unpaid for one to three months, 'substandard' if overdue for more than three months but less than half a year and 'doubtful' when due and unpaid for more than half an year.

A term loan is classified as a loss when it is due and unpaid for over a year. Easing of this criteria would mean lengthening the period within which a loan is due and unpaid.

In their letter to the Bretton Woods institutions asking for the Sh78.4 billion loan facility, the Treasury and the Central Bank of Kenya (CBK) listed changing the criteria for loan classification as one of the ways to cushion the financial sector.

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"In the interest of transparency and ensuring that NPLs [nonperforming loans] and potential losses are measured as accurately as possible, staff advises against modifying loan classification rules and welcomes the authorities' plan to sunset these by March 2021," said the IMF in its recently released staff report.

The CBK and the Treasury had listed reduction in the base rate and the cash reserve ratio and increased flexibility in loan classification and provisioning as some of the measures taken to deal with the crisis.

"The Central Bank of Kenya (CBK) has taken a number of measures to help support the economy and maintain financial stability since the start of the crisis. These include 100 bps cuts in the policy rate and cash reserve ratio, an increase in reverse repo tenors, and increased flexibility for banks' loan classification and provisioning requirements — together, these measures should help to maintain the availability of liquidity and prevent abrupt financial dislocations," the two institutions said.

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