CBK warns against rationing of loans following CRB freeze

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Economy

CBK warns against rationing of loans following CRB freeze


The Governor of the Central Bank of Kenya, Patrick Njoroge. PHOTO | SALATON NJAU | NMG

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Summary

  • CBK Governor Patrick Njoroge said on Monday that banks could avoid lending to individuals and small traders on a scale last seen between September 2016 and November 2019, when Kenya capped interest rates .
  • President Uhuru Kenyatta on October 20 announced the suspension of the CRB’s listing for loans past due since October of last year, with relief to last until September of next year.
  • Over 14 million loan accounts were negatively listed with CRBs as of January this year, highlighting the difficulties Kenyans face with repayments.

The Central Bank of Kenya (CBK) has warned that commercial banks could resume rationing loans after the blacklist of defaulters was suspended with loans of 5 million shillings and less.

The warning came even as the banking regulator gave the green light to the moratorium on the negative list of borrowers with loans below 5 million shillings from credit reference bureaus (CRBs) for a year, reducing credit information in the banking industry.

CBK Governor Patrick Njoroge said on Monday that banks could avoid lending to individuals and small traders on a scale last seen between September 2016 and November 2019, when Kenya capped interest rates .

Bankers say a lack of credit reference information could contribute to soaring loan costs and blocking business loans due to incomplete information on borrowers.

President Uhuru Kenyatta on October 20 announced the suspension of the CRB’s listing for loans past due since October of last year, with relief to last until September of next year.

The reduction of CRB registration is part of a stimulus plan to protect struggling businesses and households from the effects of the Covid-19 pandemic, which has affected consumer demand and forced businesses to shut down jobs and reduce their operations.

But the CBK believes the move could limit the growth of loans to the private sector.

“The suspension could have a negative impact on the granting of credit by banks to the target group (MSMEs) as they will be unable to distinguish between good and bad borrowers during the period of suspension,” the CBK said in a statement.

“This could lead to credit rationing, as was evident during the period of interest rate caps from 2016 to 2019.”

The CBK directive follows the publication of a legal opinion by Cabinet Secretary to the Treasury Ukur Yatani last Friday to enforce the October 20 presidential directive.

Borrowers reported to one of Kenya’s three CRBs jeopardize their chances of being able to borrow more.

The suspension is the second since Kenya reported the first case of Covid-19 last year as the state works to protect households and businesses from credit freezes.

The CBK ordered a six-month suspension of CRB listings in April last year as part of measures to amortize borrowers affected by the pandemic.

The moratorium expired in October, allowing financial institutions to start sending the names of defaulters to CRBs. Lenders, however, have offered defaults 90 days from Oct. 1 to start paying off their loans or be blacklisted.

The Kenya Bankers Association (KBA), the lobby for lenders, said banks should be allowed access to credit information from CRBs to avoid massive rationing similar to what was seen during the rate control regime. interest.

KBA said at least one million “at risk” customers were excluded from credit when the government imposed the cap, which limited commercial rates to less than four percentage points of the central bank rate.

KBA Managing Director Habil Olaka insisted that the CBK circular prohibited the listing of negative credit data with CRBs and not access to borrower information.

“We may not necessarily have rationing if the implementation is done prudently so that banks still have some access to the creditworthiness of the borrower even if the entity is not listed,” Dr Olaka said.

“What the central bank suspended is the issue of the blacklist, but otherwise the rest of the CIS [credit information sharing] mechanism must continue.

The new ruling aims to protect troubled small businesses and families from a negative list with CRBs for defaulting on a loan of less than 5 million shillings from April 2020, with the aim of boosting the economic recovery from pandemic shocks.

Dr Njoroge, however, says this could be counterproductive for MSMEs, as banks will be reluctant to extend credit to borrowers without access to recent credit histories.

Lenders rely in part on borrowing history under the Credit Information Sharing Mechanism – where banks, saccos, and microfinance firms share data with CRBs – when lending to creditors. MSMEs, which usually do not have collateral such as title deeds for land and buildings.

“The CIS mechanism aims to fill the information gap on the creditworthiness of borrowers by taking into account the borrower’s credit history and allowing credit pricing accordingly,” Dr Njoroge said in the statement.

“A good credit history demonstrates the higher creditworthiness of the borrower and should lead to a lower cost of credit.”

The ratio of non-performing loans to total loans in the banking sector stood at 13.9% or Sh441.8 billion in August compared to 14.2% or Sh438.3 billion in April.

More than 14 million loan accounts were negatively listed with CRBs as of January this year, highlighting the difficulties Kenyans face with repayments amid a slow recovery from the Covid hits.

“The suspension is intended to tie up MSMEs and for a specified period of time that will provide a space to run their businesses,” said Dr Njoroge.

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