Banks to hit loan defaulters with higher interest charges

A bank teller serves a customer. Some lenders have set out new interest charges for overdue loans to take effect next month. [File, Standard]

Borrowers are in for a rude shock as banks plot to slap them with new penalties if they fail to pay loans on time.

Defaulters will pay between 15 and 20 per cent on the outstanding amount, according to letters sent to customers that The Standard has seen.

Lenders are exploiting gaps in the interest rate caps law, which does not specify the charge for defaulting, to change the high rates.

Central Bank of Kenya did not respond to our queries about the recommended band that lenders could charge defaulters.

The Standard has established that Commercial Bank of Africa and Stanbic Bank have already served their borrowers with notices warning that they will start levying the punitive charges.

“We take this opportunity to remind you that all credit facilities are meant to be paid on their due date or within the approved limits. In case the credit facilities are in arrears, the bank will levy a one per cent facility fee and an interest rate of Central Bank Rate (CBR) + 4% per annum on the entire amount in arrears until the amount is repaid in full,” CBA wrote to its clients.

The bank said the one per cent per month facility fee will be applicable to loan facilities that are in arrears as well as credit cards and overdrafts that are in excess of approved limits.

In the case of Stanbic Bank, the rate will be as high as 20 per cent.

“If any sum payable by the borrower under the facilities is not paid when due, and therefore resulting in an event of default, such sum will attract an overdue payment charge at a rate equivalent to the facility lending rate prevailing from time to time plus six percentage points for amounts drawn down in Kenya Shillings,” said Stanbic in a notice.

The bank will also charge defaulting Dollar, Sterling pounds and Euro loans, which are mostly issued to corporates, at the bank’s applicable base rate plus 10 percentage points.

Foot expenses

The Standard could not establish whether the punitive rates will be a one-off or perpetual once a borrower defaults, but a Stanbic communications officer emailed that ‘the interest is charged on the defaulted amount only’.

CBA did not respond to our calls or messages.

Stanbic says the penalties, which will kick start on August 1, will be used to foot the bill of expenses that the bank may incur in realising a security interest or protecting the subject matter of a security interest.

It will also meet expenses that the bank may incur after a cheque or other instrument of payment given by the borrower is dishonoured and the loss that the bank may suffer in funding the default of the borrower, says the bank.

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