Kenyan banks forced to renegotiate with borrowers

By Otiato Guguyu | Published Tue, October 10th 2017 at 10:21, Updated October 10th 2017 at 10:29 GMT +3

A Toyota IQ is packed, blocking access to one of the go-downs in the Nairobi Industrial Area facing up to Leakey’s Auctioneers stores.

In fact, there are several vehicles that have turned a short access street into a parking lot as their owners file into Leakey’s to take part in an auction.

The real parking lot for the auction business, started by Jonathan Harry Erskine Leakey in 1994, is filled with several 4X4 off-road vehicles bearing United Nations plates.

They are all on sale after being decommissioned from the Dadaab refugee camp.

Ideally, these should be in the storage area, but already, the three-acre yard is packed to the rafters saving no room for more vehicles.

This single storage yard tells a queer story of how borrowers are losing cars to banks at a very high rate - yet the same banks are seemingly unable to resell them to recover the debt.

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In the two decades that George Muiruri has worked at the facility, times have never been this harder for borrowers – going by the sheer number of repossessions.

“It is only October, but we have attached double the numbers we chalked the whole of 2016,” Muiruri told the Financial Standard.

Thousands of vehicles ranging from personal cars to heavy-duty commercial trucks have been repossessed, with the situation at the Lunga Lunga Road yard being replicated in the company’s other branches – Kitui Road and Mombasa Road.

Despite the soaring inventories, there are no buyers. This explains why after the three years sitting on 12 acres of land cumulatively can hardly accommodate more repossessed assets.

“I think people don’t have money (to spend) which makes it a very difficult time for our business,” Muiruri said in the interview.

Microfinance institutions which often loan against assets have also witnessed a growing number of defaults and have had to repossess and sell their clients vehicles.

“A lot of accounts are recording defaults and the repossessions have gone up,” an official from Platinum credit who did not want to be named as he is not allowed to speak to the press said.

“But selling them is also a challenge as not so many people are in the market trying to buy the cars,” the source said. He reckons that there are no buyers despite the bargain prices on offer for the recovered assets.

The economy has been battered over the last couple of years with the average five per cent growth being supported mainly by government spending even as the real economy struggles.

Banks have cut loans to guard against non-performing loans which have hit Sh230.6 billion as borrowers struggle to pay and in some cases are forced to surrender their hard-earned assets.

This strain is what the Kenyan borrower shares with the country whose total stock of debt reached Sh4.412 trillion as of August, prompting global rating agencies to warn that the country may soon struggle to pay back its creditors, and as a result have put Kenya’s credit ratings on a downgrade review.

But as businesses struggle and bankruptcies are filed for a number of reasons, regardless of the economic climate, this tends to provide opportunities for others to purchase assets of distressed borrowers through the bankruptcy process. 

Apart from the difficulty to sell, Muiruri has to deal with an even bigger problem - attending to defaulters who are genuine victims of the slowdown of the economy and the government’s lengthy procedures of paying supplier

Such borrowers, he explained, are the new face of defaulters whose outstanding bank loans are a small proportion of the unpaid invoices that has seen growing numbers of defaults.

“We are attaching assets from borrowers who are under much trauma that often we have to become counsellors,” he added, citing the number of times his subjects have broken down on losing property to auctioneers.

Mr Muiruri says in most cases, it is not the fault of a borrower to default on the loan but the mess has been perpetuated by financial woes linked to unpaid invoices for either goods delivered or services rendered.

A worsening credit crunch caused by the refusal by banks to extend loans in protest against a recent law that regulated lending rates is also being cited as key to the spike in defaults.

Typically, businesses would run to banks seeking a bailout to cover working capital requirements to ensure continuity even when such delays in payments arise. But with slowed lending since August 2015, chances of getting refinancing help have dimmed.

With reduced chances of bailout, any disruptions in cash flow translate to wide ramifications for businesses.

In worse scenarios, it stretches to staff rationalisation or even closing shop. The ripple effect of job losses could also explain the rise in repossessions.

Edwin Wambua, a worker at the finance department at Leakey’s, says that the hundreds of vehicles that have been repossessed by banks recently have been on the rise in the last three years.

According to Mr Wambua, the high increase in the number of cars coming in has coincided with a slump in cars being bought at the auction markets. This, he reckons, has led to a pile-up of junk metal and dusty high-end cars at the auctioneers’ yards.

“We used to dominate the market as a source for bargain-priced secondhand vehicles, but now there are 10 other auction yards and all of them are full to capacity,” Wambua explained.

Leakey’s stores have had to expand to a capacity of 1,000 vehicles with three yards-- one in Lunga Lunga, the four-acre yard off Kitui Road and a five-acre yard on Mombasa Road.

For banks, if a client default in servicing the loan in a period of four months, it must classify such loan as non-performing loan and as a result start the process of recovering the debt to clean its books.

Rise in NPLs

The non-performing loans in the banking industry rose to 10.7 per cent in August, up from 9.9 per cent in June, the Central Bank of Kenya (CBK) latest data shows a jump to double digits for these loans for the first time in a decade.

A recent review by CBK indicated that banks have become more aggressive in repossessing security assets as bad loans soar. This may have translated to more cars finding their way into auctioneers’ yards.

According to Reuters news, Leakey’s has been holding 10 auctions a month, up from about four, a year ago.

But getting buyers has been a problem. A slow economy has meant that demand is low forcing lenders into some very uncomfortable compromises.

Mr Wambua says that some banks have had to call clients for re-negotiations so that they can take back their cars but on condition that payments for the loans are on time.

“We hear cases where clients are called and told, ‘take back the car and let us talk about the loan’ instead of the vehicle remaining in the yard,” explained Wambua.

Equity Bank, NIC Bank, Stanbic Bank and Kenya Commercial Bank have all accumulated auction cars in the hundreds. However, efforts to get a comment from the lenders have been fruitless as they preferred not talking about the clients.

It is alleged that in a surprise move, some of the lenders did an audit on their competitors’ position on the issue and were pleasantly surprised to discover that they were not alone. The stagnating sales, especially in asset financing, is becoming an industry-wide problem.

With delays in getting deals, storage fees are raking up and banks have had to come and try to negotiate with the auctioneers as the vehicles sink into disrepair while years go by. “It is affecting us too, the sales have gone down and we are not getting money since banks only pay on release,” Wambua said.

An auction is usually done to push prices from a reserve price so that its owner can derive as much value as they can get for an item.

At the Leakey’s yard, a tiny golden bell is chimed and the bidders flow into a stuffy overheated hall to wait for the auction to begin. The crowd of just over 100, with barely 10 women, follow the auctioneer’s voice as he reads the terms indemnifying the UN and Leakey’s of any liability and giving timelines and conditions that have to be met.

Once settled, in about three minutes, a bid of Sh300,000 becomes a buying price of Sh1.7 million vehicle as the bidders raise their hands to the ranting auctioneers ever increasing prices. But for lenders, the story is different.

Banks have had to reduce reserve prices of the vehicles they have repossessed to try and encourage buyers.

Banks have moved from printing small advertisements on the classified pages of vehicles they want to sell off, to buying full newspaper pages. This frenzy has been led by the Kenya Commercial Bank and the asset lender, NIC.

Apparently every time they have put up the advertisements, the price has been slipping downwards.

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