Tougher rules for borrowers seeking personal loan relief

When the Central Bank of Kenya (CBK) announced last month that lenders would offer relief on personal loans for borrowers distressed by the Covid-19 global pandemic, there was excitement among many debtors, especially those who expected to benefit from the three-month holiday.

To cushion borrowers, the banking regulator had said that all current loans as at March 2, 2020 would be eligible for short payment holidays of upto three months or rescheduled payments of upto one year.

A spot check by the Business Daily, however, revealed stringent conditions that had caught borrowers by surprise. Some banks have for instance asked borrowers seeking to defer repayment of their loans to provide letters from employers showing proof of salary cuts or job termination as a condition to be considered for the relief.

“You may visit any nearest branch to request for a loan relief through our loan officers. You will require a letter from your employer indicating a salary cut or job termination,” one of the banks says in a notice to customers.

The bankers’ lobby group, Kenya Bankers Association (KBA), said the stringent relief conditions were in line with the CBK guidelines.

Central Bank had in March cut its benchmark rate by the largest margin in three-and-a-half years and lowered the statutory deposits that banks must hold with the regulator to boost flow of cash in an economy plagued by the pandemic.

The benchmark rate was cut by one percentage point to 7.25 percent, a pointer of policy bias towards cheaper loans. The regulator also reduced the cash reserve ratio (CRR) for commercial banks to 4.25 percent from 5.25 percent, saying the move would release an extra Sh35.2 billion for lending.

CBK has maintained that the excess cash reserves resulting from lower CRR requirements would be provided to banks based on their demonstrated requirement to directly support borrowers distressed as a result of Covid-19.

KBA chief executive Habil Olaka, backing the regulator’s position, said relief to the banks by CBK will only be accorded for the loans that were directly extended to support customers who fell into arrears because of Covid-19.”

“This requires the bank to demonstrate that the affected account was performing as at 2nd March and only defaulted thereafter (hence likely attributable to Covid-19),” he said in response to queries from the Business Daily.

Mr Olaka said the CBK had allowed banks some relief from provisions of the prudential guidelines on classification and provisioning of accounts, on conditions that the bank demonstrates the account was performing as at 2/3/20 and the subsequent default is attributable to the pandemic.

“To satisfy this requirement, banks will request for this information, which will be unique depending on the type of borrowing,” he said.

“For example, check-off loans (off payroll) will default when one’s employment income is affected either through termination, salary cuts or other downward adjustments as a consequence of the Covid pandemic. Evidence of such will therefore be obtained by the bank as a CBK requirement.”

However, the Consumer Federation of Kenya (Cofek), said the tough qualifying conditions to delay loans mean that many distressed borrowers may be unable to qualify for the relief.

Cofek said the moratorium was unlikely to achieve the desired results due to the stringent conditions. “…it would be unfortunate (for banks) to make unreasonable demands (for loan relief),” said Cofek secretary-general Stephen Mutoro.

Under the relief deal, banks and other financial institutions are also expected to offer payments breaks or flexible arrangements on mortgages and other loans held by customers affected by economic fallout from Covid-19.

In addition, the President directed the temporary suspension of the listing with credit reference bureaus (CRBs) of any person, Micro, Small and Medium Enterprises (MSMEs) and corporate entities whose loan accounts fall overdue or into arrears, effective April 1.

Credit to the private sector grew by 7.7 percent in the year to February, compared to 7.1 percent in the year to December, both below the ideal growth level of between 12 and 15 percent for supporting economic growth. Among lenders who have announced holidays are Stanbic Bank Kenya, which announced a loan holiday for small and medium-sized enterprises (SMEs) and its personal banking customers, with effect from April 1.

Absa Bank Kenya has also announced that it has restructured customer loans amounting to over Sh8.3 billion as part of the relief programme to cushion borrowers against the financial distress triggered by the Covid-19 global pandemic.