Banks toughen personal loan rules to tame rising bad debt
Banks expect defaults to increase among personal, household loans, and trade credit in the quarter to the end of March this year.
What you need to know:
- CBK has attributed the tightening of credit terms to pessimism about economic activity.
- Credit standards are the guidelines used to determine a customer's financial strength.
Commercial banks have set tough terms for personal and household loans amid projections of higher default rates in a shaky economy.
A new credit survey report by the Central Bank of Kenya (CBK) for the three months to December, showed that lenders tightened credit guidelines to the real estate, personal and household sectors for fear of a pile-up in non-performing loans(NPLs).
This comes as banks expect defaults to increase among personal, household loans, and trade credit in the quarter to the end of March this year.
“In the quarter ended December 31, 2023, eight factors had little impact on credit standards whereas expectations regarding general activity led to tightening of credit standards,” said the CBK in the survey.
Quality of security offered
“Respondents indicated that the level of NPLs is expected to remain constant in nine economic sectors and increase in personal, household, and trade sectors during the next quarter.”
CBK has attributed the tightening of credit terms to pessimism about economic activity at the start of the year.
Credit standards are the guidelines used to determine a customer's financial strength and ability to pay their obligations. They are used to control and manage risk to an acceptable level for any company.
This comes in various forms including a requirement for higher collateral, and additional scrutiny on unsecured facilities.
Banks can also cut the amount of money extended to customers based on the quality of security offered or trim the portfolio of loans available to specific sectors in distress.
Threshold for credit extension
“The sectors that show tendencies of elevated risks are subjected to a higher standard to meet the threshold for credit extension. This is usually by enhancing ratios such as debt service coverage and value to loan ratios,” said Mr Habil Olaka, chief executive officer of the Kenya Bankers Association.
“For example, if an application is received from a sector whose credit standards have been tightened, it would be subjected to a higher standard to qualify for credit.”
More than half of the 38 licensed commercial banks or 54 per cent of the survey’s respondents indicated that non-performing loans were likely to rise in the first quarter of 2024.
The banking industry’s gross non-performing loans stood at Sh621.3 billion at the end of last year, having eased slightly from Sh635.8 billion in November.
