Banks mull new law on maximum amount recoverable from debtors

Banks and financial institutions are mulling new provisions of the Banking Act which cap the maximum amount recoverable from a defaulter.

Section 44 A of the Banking (Amended) Act 2007, which came into effect on May 1, 2007, states that an institution shall be limited in what it may recover from a debtor with respect to a non–performing loan.

Recent beneficiaries of this law include the directors of Rupa (K) Ltd, Mr David Karanja Kamau and Mr Cyrus Buimwe Kamau.

High Court Judge Eric Ogola, in his judgment dated June 25, 2014, declined to grant orders that the two pay Kenya Commercial Bank (KCB) amounts which would have in effect exceeded the principal when their loan became non-performing, citing provisions of the Act.

MAXMUM AMOUNT

The maximum amount recoverable by a bank is the sum of; the principal owing when the loan became non-performing, and interest in accordance with the contract between the debtor and the institution, but not exceeding the principal owing when the loan became non-performing.

In addition, the said law provides that the bank will recover expenses incurred in the recovery of any amounts owed by the debtor.

The suit filed by the bank was premised on continuing guarantees and indemnities dated February 29, 1996, signed by the two directors in consideration of KCB granting Rupa (K) Ltd certain banking facilities.

The court heard that the directors bound themselves to the payment to KCB on demand of any sums due under the said guarantees and indemnities.

The relationship between the directors and the bank flourished until April 30, 1995, when they alleged that the bank started levying unlawful rates of interest. Irreconcilable differences emerged in the years that followed and the matter was filed in court by the bank seeking unpaid balances.

The bank demanded a sum of Sh3,197,396.96 plus interest, from the defendants after having closed the account, which became non-performing since July 31, 2002.

“Section 44 A of the Banking Act Cap 488 of the Laws of Kenya necessarily comes into play to limit the amount that KCB can recover with respect to a non-performing loan,” said Mr Justice Ogola in his judgment. He substantially reduced the claim by the bank to be in line with the law, taking into account the time it became operational.

The judgment by the High Court is a reprieve to loan defaulters whose non-performing loans have been the reason they are being hunted down by banks claiming accrued interests dating back many years, and which have accumulated to exceed the outstanding principal sum.

According to Mr Wilfred Onono, managing consultant at the Interest Rate Advisory Centre (IRAC), Section 44 of the Banking Act is one of the latest interventions on banking issues.

LEGAL PROTECTION

The judge acknowledged that banks should not continue to charge interests forever. “When a person has defaulted and can’t service a loan, the law has provided protection and the maximum interest charged by the bank,” Mr Onono.

He added that according to the Central Bank of Kenya guidelines, a loan is classified as non-performing when the borrower fails to service it for three months.

“It is at this point when Section 44 of the Banking Act comes in to limit interests.”

Mr Thomas Manyura, consultant and credit analysis at IRAC, said the law makes it mandatory that banks give 30 days’ notice before making adjustments on interest.