How banks plan to evaluate borrowers post rate cap era

Thursday, August 22nd, 2019 09:00 | By
Inland Container Depots head Peter Masinda (right) explains new operational strategies to Acting National Treasury Cabinet Secretary Ukur Yatani (centre) and Kenya Revenue Authority chairman Francis Muthaura during their tour of Embakasi Inland Container Depot yesterday. Photo/PD/ALICE MBURU

Kenya Bankers Association (KBA) has unveiled how it intends to roll out a risk-based credit pricing mechanism for borrowers if loan capping law is reviewed by Parliament. 

A memorandum presented to National Assembly Finance committee yesterday and seen by Business Hub, one’s risk profile will not change should interest rate caps be modified.

“Banks are committed to maintaining the current performing customers’ loan contracts within the existing contractual framework. It is only new loan contracts that will be risk-price post the repeal of the interest rate capping law,” the memorandum read.

Loan repayment

Even in the event of repeat loans, the umbrella body of the financial institutions regulated by the Central Bank of Kenya, says appraisals will consider a customer’s past loan repayment record.

It emphasises that the repeal of the law - Section 33B of the Banking Act - will not in any way disadvantage the borrowers who have the benefit of a good track record.

“The effect of the repeal will be that the potential borrower ,who banks have been unable to price within the cap, will now be able to access funding appropriately priced commensurate with their risk profile,” the memorandum states.

KBA Chief executive officer Habil Olaka said yesterday the proposals are pegged on credit score, adverse credit history (if any), employment status and income.

He said there is growing concern about the depressed growth of credit to the private sector since the introduction of the interest caps in August 2016 due to an increase in non-performing loans (NPLs).

Olaka said due to the interest rate capping, the gross NPLs as a proportion of gross loans has scaled-up from 5.6 per cent in 2014 to 12 per cent in 2018.

“To address this challenge, the industry continues to engage stakeholders in pursuit of a long-term solution for issues such as the high cost of credit and promoting access for SMEs,” he said during the launch of KBA strategic plan in Nairobi yesterday.

Banking industry

Olaka said statistics show that the banking industry is stable and has remained on a growth trajectory in spite of regulatory and other market disturbances.

He said banks have been able to sustain their profitability based on two factors of lending to the government and adopting efficient measures such as digitising processes and retrenching staff. 

Chairman of the Parliamentary Committee on Finance and National Planning, Gideon Ochanda, asked KBA to put measures in place to ensure consumers are not exploited.

“What is it that commercial banks in Kenya will put in place to replace the interest rate cap, what will banks replace interest rate with,” he asked. He said as a House what they do not want is a situation where banks exploit consumers.

Olaka, however, assured that they have provided the road map that will address the concerns raised by the National Assembly, while ensuring private sector credit continues to grow at the rates seen prior to the interest rate controls.

John Kirimi lauded the move, saying the interest capping has done more harm than good. “The economy would have grown much if interest rate cap was repealed,” he said.

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