Banks turn the heat on defaulters

By Jackson Okoth

The grim prospect that a bank could soon send a debt collector, auctioneer or a private investigator to track you down for defaulting on loan payment is a source of worry, especially in these hard times.

Take the case of Mr Herman Mugambi, a former sales representative with a leading consumer firm in Nairobi.

Mugambi was able to obtain a personal unsecured loan of Sh 100,000 from his bank, on the strength of his Sh45,000 salary.

Conditions for the unsecured loan included a minimum salary of Sh 20,000, four months bank statements and the employer’s introduction letter.

With a variable interest rate of 19.75 per cent on the loan, Mugambi was willing to take the risk.

Being a customer of the bank, he was told he could get the loan on the agreement that his employer pays the bank directly once the deduction is done from his salary.

But his fate now hangs in the balance having been laid off a restructuring of the company he was working for.

Mugambi belongs to a large number of borrowers who have lost their jobs or source of livelihood, with an auctioneer’s hammer hanging precariously over their heads.

Signs of hard times ahead are beginning to show as banks fold up marketing tents and withdraw from the streets the sales teams that used to lure the public with cheap credit.

Slowing economy

This is due to fears that a slowing economy could lead to many customers being unable to pay their loans.

Worst hit are unsecured personal loans, popular with salaried individuals.

For the past five years, commercial banks have been on a lending spree, throwing all kinds of credit products at virtually anyone with a steady income.

With the economy expected to shrink this year, there are concerns that many borrowers may not be able to repay their loans.

It is in anticipation of this high-risk exposure that banks are not taking chances.

Already pursuing a tight risk management regime is Barclays Bank. "We intend to have a calculated growth of our loan book to avoid unnecessary risks," said Adan Mohamed, the bank’s managing director.

But for the more liquid Equity Bank — compared to Barclays Bank —the strategy is not slowing down lending. Instead, it is enhancing provisions on the loan book to maintain its quality in the light of the expected economic downturn.

"We are improving our collection capability to track defaulting loans," said Mohamed.

Unsecured lending

Barclays is among banks that went big on unsecured lending, offering up to Sh2 million with monthly repayments of between one and three years.

The second bank to release its financial results, Barclays has a loan book of Sh108.08 billion, compared to Equity’s Sh40.8 billion, implying that it faces the highest default risk based on its size and previous huge lending appetite.

But is not only in unsecured loans portfolio that a high default rate could be seen.

While secured loans are unlikely to be pose a challenge to banks, it is the large volumes of unsecured loans that is causing jitters among lenders.

"What commercial banks are likely to do in these hard times is to renegotiate new proposals with those having their loans," said Mr Reuben Marambii, National Bank managing director.

These new loan agreements will include a loan repayment rescheduling plan which varies from the older loan agreement, taking into account the borrower’s difficult circumstances.

He also discounts fears that the anticipated economic slowdown could lead to a rise in bank loan defaulters.

Repayment period

"What is likely to happen is not defaults but rescheduling of loans as banks accept less payments over an extended repayment period," says Marambii.

Auctioning property is the last resort and most banks are not willing to travel this road. The process involves the bank handing over a defaulter case to a debt collection agency.

"Upon receiving the case, we write notification letters to the defaulter, while establishing why they are unable to settle the debt," said an officer with a leading agency, specialising in collecting credit card debts.

These agencies charge a commission of between 10 and 15 per cent, depending on the amount involved.

Insurance cover

If the defaulter is unable to provide an acceptable repayment proposal, the debt collector usually instruct lawyers to file a suit in court.

Usually, it is difficult for a loan defaulter to win this suit unless proof is given that the loan agreement was signed under undue influence — like pressure from a sales person.

"There are cases when a bank loses a suit, especially for unsecured loans issued without an insurance cover," says Mr Michael Monari, Executive Director Ecobank Kenya.

With rising competition and tight liquidity within banks, the zeal to go for loan defaulters is expected to intensify.

But likely to survive this pursuit will be defaulters willing to renegotiate with the lender as well as those able to cut down on spending and borrowing to avoid further debt.