As loan defaulters pile up, banks change tact

By James Anyanzwa and John Njiraini

Flush with cash after reporting strong profits, banks are becoming more aggressive and innovative in their attempts to woo salaried workers to take up personal loans.

In a market in which the disposable income for a majority of the population is shrinking due to inflation, banks have opted to lower their exposure to risks in the personal loans segment, by going after people they perceive to be "well paid" workers on contract.

This is a complete reversal of the situation a couple of years ago, when anyone seeking a loan from a bank had to virtually lick the boots of the bank manager to get his or her signature on the application form.

The workers now being targeted have salary accounts with the banks involved, and are carefully vetted based on the amount of cash that flows into the accounts at the end of every month.

The loan repayment plans rarely exceed three years, matching the average lengths of the contracts, as this category of employees are seen as less of a risk compared to workers with permanent contracts.

Actuarial analysis shows that workers hired on contract generally have clearly laid out performance contracts, and are thus less likely to be laid off suddenly, before the contract period ends.

Conservative Tactics

The apparent change in strategy is most notable in the established international banks like Barclays and Standard Chartered, in the face of bruising competition from the likes of Equity and Family Bank.

They have unabashedly thrown off their previously conservative tactics, and are virtually "hawking" unsecured loans to selected clients, with healthy income and impressive cash flow records.

The latest strategy is informed by the fact that the banks know their clients’ financial strengths and credit history. It is also being propelled by the rising cases of non-repayments for previous unsecured loans, among the leading five banks that control over 70 per cent of the market.

"The reality is that this is not going to be a good year for banks and most are just hoping they can maintain the same level of profitability," said an industry player working for a top bank who asked not to be named.

Though critics contend the latest strategy makes the banks look desperate, the truth is that it is a less risky proposition for the banks, who even see it as value addition for potential customers.

But according to the banks’ umbrella body, the Kenya Bankers Association (KBA), the new trend does not mean that banks are adopting new lending policies.

Private Issue

"I am not aware of anything happening. I am not aware of any change of tact or any new development," claimed John Wanyela, the association’s Executive Director. Key industry players interviewed by FJ were equally reluctant to discuss the issue, saying it was a private matter.

However, the emerging shift in marketing strategy comes in the wake of growing volumes of non-performing loan (NPLs), with indications that the lending institutions will struggle to see the same lush profits this year. While some banks are promoting pre-approved unsecured loans of up to Sh3 million to the targeted special groups, others are increasing the ceilings of credit card held by some of its clients. Other bank packages are also specifically designed for these special groups.

According to a letter sent by a leading bank to one of its customers, a copy of which was obtained by the FJ, the bank informs the client that he has qualified for a pre-approved loan of Sh2.5 million, even though he has not expressed interest.

The offer, which is valid until August 31, has repayment options of 54-60 months, at equal monthly instalments of Sh42,140 and Sh39,532 respectively.

"All you have to do is complete the attached simple application form and return it to us along with a copy of your ID, and a recent copy of pay-slip," says the application letter signed the bank’s manager in-charge of retail banking.

To ease logistical burden, the bank sends the application form, the insurance form and other important information on the loan and the repayment process to the client in his or her office.

Interest Rate

The banks, which offer unsecured loans as low as Sh20,000 at the rates of between 18 and 19.75 per cent, depending on the market rate, are willing to meet the client at his convenience and location of choice.

High cost of living and job uncertainties in a struggling economy, which slumped to 1.7 per cent last year, have scared borrowers from seeking loans. It’s believed the new approach to maximise returns from existing clientele could help bridge the expected loss in interest income business.

Consequently, commercial banks are gradually moving away from the highly risky mass markets to individual account holders, whose balances could act as collaterals in the event the borrower loses his or her job.

According to official data from the Central Bank of Kenya (CBK), the stock of non-performing loans have skyrocketed by 11.4 per cent to Sh65 billion in April this year, up from Sh58.3 billion same period last year.

The grim statistics have seen the banks’ asset quality, which is measured by the ratio of net non-performing loans (NPLs) to gross loans deteriorate from 3.1 per cent to 4.0 per cent.

The predicament facing banks might not improve any time soon, with CBK’s Monetary Policy Committee expected to meet this week. The committee formulates monetary policy by setting the threshold for the Central Bank Rate. Analysts expect the rate fixed at at eight per cent.

This would mean the rates would remain low, even as demand for credit is depressed.