By John Oyuke
Borrowers will have to grapple with stringent lending rules if new proposals are implemented by Central Bank of Kenya (CBK).
The rules, intended to clamp down on poor lending practices, are set to be implemented on August 1.
Though the guidelines have not been finalised, and are still open for comment by stakeholders and the public, they could be have broad implications for borrowers if implemented as scripted.
According to the guidelines, any sign of potential default on a loan would subject concerned borrowers to additional oversight and monitoring, for example, through more frequent visits from credit officers, and inclusion on a watch list that is regularly reviewed by senior management.
Other indicators to be monitored keenly by banks are borrower‘s principal and interest repayments, account activity, as well as instances of excesses over credit limits.
Banks are also expected to monitor borrower‘s ability to adhere to pledges and financial covenants stated in the loan agreement and any breaches of the loan covenant detected would trigger prompt action.
In addition to monitoring the above risk indicators, CBK requires that banking institutions should also monitor use of funds to determine whether credit facilities are drawn down for their intended purposes.
“Where a borrower has utilised funds for purposes not shown in the original proposal, the bank should determine the implications on the creditworthiness of the obligor,” CBK says in its memorandum to banks.
Exceptions noted during the monitoring process should be promptly acted upon and reported to management.
According to the CBK Director, Bank supervision Department, Fredrick Pere, under the new legal dispensation commercial banks would have to operate under sound and well-defined credit-granting criteria.
“These criteria should include a thorough understanding of the borrower or counterparty, as well as the purpose and structure of the credit, and its source of repayment. Banks must receive sufficient information to enable a comprehensive assessment of the true risk profile of the borrower or counterparty,” he says.
Credit risk rating system, considered an important tool in monitoring the quality of individual credits, as well as the total portfolio, should be able to verify the financial position and business condition of the borrower, conduct of the borrower‘s accounts, adherence to loan covenants and value of collateral.