Barclays Bank of Kenya Chief Executive Officer Adan Mohammed however admits that in the fourth quarter of 2011 when lending rates soared to an average of 26 percent, there were some delays in the repayments.
“Because of the inflationary pressures; because salaries get delayed in some cases, you will see people making their repayments a lot more later than they have in the past,” he disclosed.
To deal with such situations – even a day’s delay – Mohammed said the bank has had to make provisions for some of those loans.
“That is not to say that those provisions will stay for a very long time but it’s just to be prudent to make sure that if we feel like there is likely to be a challenge in the future, we make provisions,” he explained.
“If a person pays in full in the following month, we will reverse that (provision),” the CEO went on.
This, he added was because their loan book was fairly targeted for consumer loans which they projected were likely to be hardest hit by the surging rates and hence likely to increase default risks.
Standard Chartered Bank’s Executive Director for Consumer Banking Kariuki Ngari also attributed the minimal default rates in the sector to the move by many banks to cushion their customers against the soaring rates through for instance extension of the loan repayment period.
“We understood that our customers were going through a hard period and so what we did for instance with the mortgage is that we extended the term such as net-net from your salary, they (customers) were not worse off,” he explained.
In mid December 2011, the banks through their lobby group the Kenya Bankers Association (KBA) announced a raft of guidelines which they said were designed to reduce the chances of default as well as the rate of Non- Performing Loans (NPL) on their books.
Among the measures was the waiver of early repayment penalties, which KBA said was meant to ensure that borrowers are not subjected to additional financial burden when interest rates are rising.
“Where banks decide to increase the interest rates from the contracted rate, borrowers will have the discretion to repay the outstanding loan balance in full or in part without being subjected to early repayment penalties,” the KBA statement read.
However, bankers say a ‘blanket’ waiver for all borrowers wishing to repay their loans in lump sum does not apply.
Instead, Ngari explained that the waiver is considered on a case to case basis depending on the contractual agreement that the borrower and the banks entered into at the initial loan application.
“It’s (waiver) not open-ended. Some customers may come early, like those who came (settled) in December and there are those who many opt to settle theirs in mid this year, that is why we look at this on a case on case basis,” Ngari emphasised.
The same concerns for customers is also being exhibited by ABC Bank with the Group MD Shamaz Savani explaining that they have also had to restructure the loans in a way that they can lessen the burden on their borrowers.
Despite these developments however, the players admit that the high interest levels will negatively affect the consumption of consumer loans in the next 12 months.
“Our view is that rates are a fairly high level that will not support significant bullish growth in consumer loans at the kind of rates that people are paying today,” they contend.
The industry has in the last 10 years, experienced an explosion in consumer lending mainly underpinned by the low interest rate regime witnessed in the country during that period.