Tuesday, June 3, 2008

Loan borrowers feel the heat as banks tighten noose

Daily Nation
Publication Date: 5/31/2008

The rush for easy credit in the form of loans and credit cards from banks and micro-finance institutions is causing untold financial and emotional misery to many Kenyans.

Unlike in the past when getting a loan required lengthy procedures, when borrowers had to produce security in the form of land, vehicles and other assets,
lately the only security required is a payslip.

This liberalisation of lending procedures has led to a steep rise in the number of individuals seeking loans.

And although many other factors are at play for defaulting, the leading cause for individual borrowers is imprudent lending and imprudent borrowing by the banks and borrowers respectively.

Security of payslips

Many of these individuals clearly bite more than they can chew — banks are giving out loans on the security of payslips that clearly show that the borrowers’ incomes cannot match the sums advanced.

The other reasons for defaulting include loss of jobs, divorce — particularly in cases where a loan was borrowed jointly by a couple — and high interest rates.

Hard economic times or other calamities, like the election crisis following last December’s General Election, also contribute to defaulting.

Faced with huge debt portfolios, the banks are now engaging the services of lawyers and other debt collectors to assist in the recovery of the lent sums.

Lawyers instructed by banks to recover any such debts from the defaulters are shocked by the failure of borrowers to read between the lines before they sign for the loans.

They give little regard to the contractual implications of the loans they sign up for.

Over and above

For instance, a credit card holder with a limit of Sh50,000 utilises that sum and defaults.

When a lawyer is instructed to demand this sum, over and above the Sh50,000 due on the card, there is interest applicable at commercial rates of about 18 per cent on the principal, which translates to Sh9,000 in addition to a debt collection fee in the region of Sh15,000.

Therefore, at the first attempt of recovery, the defaulter will be required to pay Sh74,000. But many believe that the other charges that inflate the debt are not due.

If the default period increases, the sum is compounded and even becomes more burdensome to settle.

As such, a debt that seems manageable can become so huge and beyond the borrower’s ability to repay — in just four or five years, the Sh50,000 can rise to as high as Sh1 million!

The situation is further compounded where it takes long before a bank takes action to recover any such sum that has not been repaid.

The consequence has always been that any other extra charges that would have accrued pursuant to such inaction by a bank would be paid by the borrower.

In cases where there are disputes which proceed to court, the borrower is condemned to pay all the interest that would accumulate while the case is being heard if a ruling is delivered against him or her.

And the Banking Act has not made any attempts to control interest applicable on non-performing loans.

Therefore, for as long as a borrower is still paying, the rate would vary depending on the vagaries that influence the changes in the cost of loans.

It is only when a loan becomes non-performing that some control on interest chargeable appears to have been imposed.

Section 44A of the Banking Act provides “that the amount recoverable by a bank from a debtor in respect of a non-performing loan shall be limited to:

  • Principal amount owing when the loan becomes non-performing.
  • Interest in accordance with the contract between the debtor and bank, but not exceeding the principal owing when the loan becomes non-performing.
  • Expenses incurred in recovering the loan.
The implication is that the borrower still faces the likelihood of meeting the huge cost of lending.

Consequently, it becomes exceedingly difficult for the average borrower who does not have other sources of income to service these loans.

On many occasions borrowers have resorted to selling some of their valuable assets to offset these loans.

In extreme circumstances where it is established that a borrower does not have sufficient assets, the banks may resort to committing the borrower to civil jail.

The resultant effect is that funds that were clearly intended to be of benefit end up being sources of distress.

Mr Kolla is an advocate of the High Court

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