CRB ratings freeze hurts personal loans, lenders say

Capital markets

CRB ratings freeze hurts personal loans, lenders say


Central Bank of Kenya. FILE PHOTO | NMG

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Summary

  • An estimated 99% of the 4.6 million loan accounts listed negatively with the CRBs will have their data frozen after the suspension.
  • CRB data shows companies can only share default data for fewer than 50,000 loan accounts.
  • The freezing of information sharing on small borrowers has forced banks to rely on their own data to manage short-term default risk.

The suspension of the list of borrowers in default on loans under 5 million shillings is hurting lending and credit risk management in personal loans, according to lenders.

Banks were barred from reporting defaults under the set limit for 12 months from October last year. The freeze is expected to end on September 30.

The move is seen as an effort by the government to offer financial relief to Kenyans recovering from a drop in income as a result of Covid-19.

“The requirement to stop registering customers with loans below 5 million shillings with credit reference bureaus will likely continue to impact our business performance, particularly in the retail banking sector” , says Absa Bank Kenya in its latest annual report.

An estimated 99% of the 4.6 million loan accounts listed negatively with the CRBs will have their data frozen after the suspension.

CRB data shows companies can only share default data for fewer than 50,000 loan accounts. Most of the negative listings were for loans obtained through cellphones.

Banks have used CRBs to weigh default risk and also as a deterrent. It’s a particularly important tool in the unsecured personal loan category where borrowers rely on wages and small business income to repay.

The freezing of information sharing on small borrowers has forced banks to rely on their own data to manage short-term default risk.

A customer’s loan repayment history, for example, can be used to assess creditworthiness. Despite the suspension of the negative list, retail lending was among the segments that recorded growth, according to data from the Central Bank of Kenya.

Loans to households reached 482.6 billion shillings in February from 465.9 billion shillings in September last year, an increase of 16.7 billion shillings.

Lending to the transport and communications sectors saw the largest expansion from 31.8 billion shillings to 270 billion shillings. Real estate was one of two sectors to register a decline in credit, falling by 3 billion shillings to 410.4 billion shillings.

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