Borrowers starved of credit as economy slows down
By Otiato Guguyu | November 28th 2016
The most affordable place for a Kenyan to take a loan has always been from Savings and Credit Cooperatives (Saccos). The loan is non-collateralised with low interest rates.
It has also been the easiest loans to get. However, one thing that has made it the most difficult is getting colleagues to sign off as guarantors in these times of mass job losses, so you don’t drop the ball on them.
This exemplifies the crisis of a depressed real economy where loan delinquency is at an all-time high as more and more individuals and businesses find it difficult to service their debts as people are fired and profits drop.
“For the last one-to-two years we have had problems when it comes to repayments. I think it’s the economy, something is not right, there’s no money and that has really affected people’s ability to pay,” Eric Oluoch, Business Development Director at Debt Management firm, Quest, told Business Beat.
Mr Oluoch whose company helps banks collect bad debts said majority of these individuals have been laid off. “A guy who knew he was going to be employed in the next 10 years so he takes a loan where he will be paying Sh20,000 a month and then he is fired after five months, there’s nothing you can do about that, because creating that ability is to tell him to try and talk to his relatives or maybe get another loan which he can’t,” he said.
Surge in bad loans
Kenyan banks’ non-performing loans (NPLs) rose to 8 per cent of the total in March from 5.7 percent in the same period last year. The past two years have also seen Central Bank of Kenya insist that loans should be properly classified and sufficient resources provided for bad ones which has eaten into bank profitability.
In the current round of financial results, NIC Bank saw a 5 per cent dip in net earnings on setting aside Sh3.1 billion for NPLs. In September, NIC was given a negative outlook by South African credit rating agency, Global Credit Rating for its surge in bad loans.
Barclays Bank of Kenya posted Sh6 billion in profit down from Sh6.4 billion after bad debts rose to Sh10.4 billion prompting it to set aside Sh4.5 billion as provisions. Bad loans stood at Sh6.9 billion a year ago.
Bad loans at Kenya Commercial Bank rose from Sh18.1 billion to Sh26.4 billion while Equity Bank saw NPLs rise from Sh9.2 billion to Sh13.3 billion.
Another lender, Housing Finance Group saw bad loans jump by 36 per cent to Sh5.5 billion from Sh4 billion while I&M Bank had gross NPLs that surged by 64.5 per cent to Sh6.23 billion.
“Willingness to pay exists but ability to pay has really gone down, so you find financial institutions’ bad books are growing, not necessarily because the risks are bad but the books are affected by the economy,” Mr Oluoch said. This has fed into the inability of financial institutions to lend on the back of increased bad credit ratings which saw banks lend less and less money, sparking worries that the private sector economy may be grinding to a halt.
Analysts have warned that this shrinking in private sector borrowing is likely to bog down economic growth next year and dim bank prospects of surviving the interest rate caps regime.
Reuters quoted the director general of fiscal and economic affairs Geoffrey Mwau last week, indicating that Treasury forecast the economy to expand by just over 6 per cent next year, down from an initial forecast of 6.5 per cent, mainly because of slowing private-sector credit growth. “We have moderated our growth (forecast) in 2017 to slightly over 6 percent. Before we were very optimistic it would get to 6.5 percent,” Mr Mwau, told Reuters.
Standard Chartered Plc Chief Economist for Africa Razia Khan last week cut her forecast for growth next year to 5 per cent from a previous estimate of 5.6 per cent, citing weaker credit growth according to Bloomberg news.
Economic think tank, Focus Economics says slowing private sector credit and rising political uncertainties regarding presidential elections in August next year will put pressure on growth, which they predict at 5.7 per cent next year. CBK data shows that between January and February this year, credit growth fell by Sh800 million and between May and June it increased by Sh2.2 billion. However, private sector credit only grew by Sh2 billion in August to Sh2.260 trillion from Sh2.258 trillion in July. CBK said that private sector credit grew just 7.1 percent in July from 17.8 percent in December of last year.
Stanbic Bank regional economist Jibran Qureishi said that this was due to high non-performing loans and rate hikes by the CBK. “Private sector credit goes through cycles and usually at peak times lenders expand credit until the economy overheats forcing rate jerks as happened last year but due to a lag effect shrinking is seen 6 to 9 months later,” Mr Qureishi.
The CBK increased the indicative lending rate from 8.5 per cent to 10 per cent in June and further up to 11.5 per cent in July where it remained for a year. This allowed banks to hike lending rates for borrowers ranging between 18 to 25 per cent; making it expensive to borrow and hard to repay hence default cases.
The policy team reduced the Central Bank Rate from 11.5 per cent to 10.5 per cent in March and cut back further to 10 per cent in September although Mr Qureishi says it may not reverse the shrinking rate of borrowing under the rate capping regime.
CBK Governor Patrick Njoroge noted that MPC was concerned that private sector credit was slowing down when the regulator moved to reduce the cost of borrowing with the law capping interest rates. The law effectively capped interest rates to 4 percentage points above CBR currently setting it at 14 per cent.
Analyst have questioned whether it has served as a remedy for lower cost of credit given that banks have introduced additional fees for appraisals and negotiation wiping out the marginal gains. “I do not think the monetary policy committed action will be a solution, the dynamics have changed with the capping of interest rates, it is not a CBR story anymore,” Querishi said.
He said that since banks can no longer price for risks, they will be shy of lending to potential defaulters who will dent their profitability as a result of loan loss impairment. The surging bad loans are however business for loan management firms including Quest, Collections Africa and Metropol who are transforming the way the Bank goes after its delinquents.
Forced to pay
“We are different from your normal debt collector, we are debt managers, we try and create an ability to pay on someone who doesn’t have the ability and we only get paid when the person we are collecting from pays,” Mr Oluoch said.
“An auctioneer will not come to chat with you, he will come pick your property and sell and yet you are not guaranteed that 100 per cent of your debt will be gone, as a lawyer you are not going to sit down, you are going to court where you’ll be forced to pay and something will be taken from you and charged,” he said.
He said his firm has tracked the distress from companies that have traditionally been able to pay but now are in problems. The small and medium enterprises, where the struggle is, are sending their workers on leave until business picks up again.
The individual borrower, he says are categorised into two, those who are willing to pay and are undergoing distress but may be able to get back in tow a few months down the line after they get another job and those who will just not pay even if they have the ability.
“There is a saying that goes, when a guy borrows little money, it’s the individual’s problem the bank can hammer you, when someone borrows a lot, it becomes the bank’s problem,” he said.
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