The Central Bank of Kenya has widened the risk assessment mandate of lending institutions in a move that could leave thousands of potential borrowers with poor credit scores and expose them to higher interest rates or deny them access to loans.
Commercial banks and micro-lenders are now required to share a wide range of information on their customers, including records of dishonoured checks, compulsory closure of accounts and late payments or credit defaults on all types of facilities, according to the new rules published last week to facilitate the establishment of a reliable risk assessment system.
The lenders are also required to share information on non-performing loans, false declarations and statements; receiverships, bankruptcies and liquidations; tendering of false securities, misapplication of borrowed funds, proven cases of frauds, forgeries and check kiting to help profile potential borrowers in Kenya’s fast growing credit market.
Commercial banks are not expected to deny potential borrowers with a tainted past credit but will lend to them under tough conditions that are significantly different from the easy terms reserved for customers with high credit scores.
“Sharing of negative credit information does not amount to blacklisting. Such information is expected to be taken into account during the assessment of applications for loans and other bank facilities,” said the CBK in a statement. Credit reference bureaus that have been licensed to profile potential borrowers using information provided by the banks are also expected to add into the mix an individual’s record in the payment of utility bills, use of credit cards and payment of university loans.
Kenya established a credit referencing system early this year aiming to manage the high rate of loans defaults in its banking system that only escalated in the past two years of economic slowdown.
Commercial banks have also pointed to the high default risk as part of the reason interest rates in the personal loans market remain high at more than 15 per cent despite the recent decline in the benchmark Central Bank Rate (CBR) and the low inflation.
It is also expected that customer profiling and credit scoring will help borrowers negotiate the terms and conditions of their loans – a move that should help those with high credit scores get favourable terms.
Lenders say borrowers with good credit ratings could benefit from reduced interest rates besides getting waivers on other lending conditions such as collateral requirements while the banks get an additional tool to minimize non-performing loans.
“Basically this should aid growth of the credit market,” said John Wanyela, Kenya Bankers Association executive director. “It should help the lenders to reward those who pay on time and instill discipline in the credit market,” he said. Though many consumers are likely to see the new regulations as tilting the credit market landscape in favour of commercial banks, bankers maintained the information will only make risk assessment easier to the advantage of the borrowers.
“There has been no information on credit histories of individuals approaching the banks for loans and this information should make it easier to make a distinction,” said Wachira Ndege, chief executive officer, CRB Africa – a credit reference bureau.
“The person who defaults and issues dishonoured checks…gets the higher interest rate while the one who does not have these gets a lower interest rate,” he said.
Commercial banks had requested for 103,332 credit reports by the end of September, according to the Central Bank report. The number is expected to rise steadily with the licensing of more credit reference bureaus and as lenders go on the offensive in the personal loans market.
The CBK has so far licensed two credit reference bureaus and is processing two other applications.
Jared Getenga, project manager, Kenya Credit Information Sharing Initiative (KCISI), a CBK and Kenya Bankers Association initiative that is mandated to co-ordinate the credit information sharing mechanism, said customer profiling should help banks avoid lending to serial defaulters.
Information sharing is also expected to compel previously unwilling debtors to pay up offering the lenders an opportunity to significantly reduce their bad loans books culminating in lower interest rates.
“Customers will begin developing intangible collateral for use in negotiating better borrowing terms and will benefit from faster processes when obtaining loans, since information that banks require will be more readily available” said Mr Getenga. “This should also help entrench a culture of responsible borrowing that is good for society as a whole,” he added.
Under the new rules, customers are entitled to a free copy of their credit report at least once a year and within thirty days of receiving an adverse notice.
With the consent of their customer, banks can also share positive information to enhance their creditworthiness. “Sharing of positive information will enhance the credit worthiness of the customers who can use the positive credit profile to negotiate for better terms and conditions with banks,” said the CBK.
Gross loans and advances rose six per cent between June and September, according to the CBK even as the stock of gross non-performing loans (NPL’s) declined by 0.5 per cent over the three month period. Gross loans and advances went up from Sh828.9 from Sh878.8 billion while gross non-performing loans declined to Sh61.2 billion in September from Sh61.5 billion in June.
The CBK said that the quality of assets, measured as a proportion of net non-performing loans to gross loans improved to 2.5 per cent from three per cent over the same period, with the ratio of gross NPL’s to gross loans improving to seven per cent from 7.4 percent in June, this year.