Don’t be too hasty to loan out cash — defaults have doubled this year

Industry analysts say high interest rates and a slowdown in government spending are among main reasons nearly half a million people have defaulted on their loans this year.

By JAMES ANYANZWA

There are close to half a million people you should be wary of loaning your money to.

In the eight months to August this year, nearly 500,000 people were blacklisted for defaulting on loans and may find it difficult to access credit from formal institutions for the next seven-years.

This means that the only options available to one in 80 Kenyans when they need to borrow money, will be to approach shylocks or individuals who do not have access to their credit history.

The number of Kenyans defaulting on the repayment of their loans has been on a steady rise as hard economic times bite.

Banks and other financial service institutions are also seeing a rise in bad debts that they might now have to absorb.

The mass defaults — which have mostly affected banks — have been attributed largely to the high interest rates of 2011, when the cost of credit rose to upwards of 20 per cent. Stakeholders say a substantial number of the defaulters took up loans during this period.

According to data obtained from Credit Reference Bureaus (CRBs) by Business Beat, over 445,998 non-performing loan (NPL) accounts have been blacklisted.

Borrowers whose names have been forwarded to CRBs risk not accessing credit for a minimum period of seven years from the time they complete their last loan repayment.

The number of NPLs has risen from last year’s figure of 294,078, a more than 50 per cent increase in less than nine months.

Grim picture

Damning statistics paint a grim picture for commercial banks whose loan defaulters make up more than 90 per cent of NPL accounts.

Data from MetrolPol CRB Ltd shows that of the 43 commercial banks, 11 -hold a massive 405,843 of the non-performing loan accounts.

And of these, one bank accounts for 30 per cent, or 123,000, of the accounts whose owners are unable to meet their loan obligations.

Higher Education Loans Board (Helb) comes second with 74,651 NPL accounts, while defaulters from microfinance institutions (MFIs) and savings and credit cooperative societies (Saccos) account for 470 and 24 of the accounts, respectively.

Huge provisions for NPLs have previously eroded banks’ bottom line. Analysts attribute the growing levels of default in the banking industry to a high interest rate regime and increased lending to risky segments such as micro loans, SME loans and unsecured personal loans.

According to central bank, loan applications in the banking sector increased from 88,973 in May to 99,226 in July.

A loan is declared non-performing when the principal or interest is due and goes unpaid for 90 days or more, or when interest payments for 90 days or more have been re-financed or rolled over into a new loan.

John Kirimi, the executive director of Sterling Capital, said the performance of the economy is also directly related to the performance of loans, so that if the economy wobbles there is a high likelihood of default.

He also attributed the increased NPLs to aggressive marketing for personal loans.

“Banks have intensified their campaigns for unsecured loans on very generous terms, and this can eventually turn out to be a big problem,” he added.

According to James Wangunyu, chief executive of Standard Investment Bank, high interest rates are stifling investment, which is in turn fuelling defaults.

“Interest rates are not coming down and so the level of productivity is low. We believe that is the major cause of the growing non-performing loans in the banking industry.”

Interest rates are at an average 17 per cent.

Government spending

Paul Mwai, the chief executive of AIB Capital, added that slowed government spending during the early part of the year contributed to increased default rates.

He reckons contractors who had borrowed money from commercial banks were unable to service their debts on time.

The debate over interest rates does not show signs of abating.

Commercial banks maintain that the cost of attracting funds (deposits), which they then lend on to customers is still too high to allow them to lower interest rates.

This is despite the growth of mobile, online and agency banking that have lowered the costs of accepting deposits.

[email protected]