What is the Truth behind Non-Performing Loans: Employees or Customers?

A non performing loan is either in default or close to being in default. Once a loan is nonperforming, the odds that it will be repaid in full are considered to be substantially lower. If the debtor starts making payments again on a nonperforming loan, it becomes a re-performing loan, even if the debtor has not caught up on all the missed payments. A non performing loan simply means the failure of a debtor to pay back the loan or delay to pay back the loan as agreed by the lender. Let us say, you took a loan from a bank and you forego starting to pay for it for 90 days, that loan becomes a nonperforming loan.

According to Central Bank of Kenya prudential guideline in the year 2006 advances are classified into five categories:

1. Normal- these are well-documented facilities to financially sound customers where no weaknesses exist. Such advances must not have been rescheduled.
2. Watch- these are good accounts which are normally classified under one above but have exhibited some specific weaknesses and hence warrant management attention.
3. Substandard- these are facilities which though still operative involve some degree of risk and there exists possibility of some future loss unless close supervision is given and corrective action is taken to strengthen the position. For instance three months installments in arrears.
4. Doubtful debts- these are advances where major weaknesses exist. The recovery of full amount outstanding might need to be extended or is doubtful and that loss will occur. An example is an overdraft whose turnover has dried up.
5. Loss- these are facilities with outstanding arrears that are regarded as being uncollectable and where security is worthless or has been disposed off, the proceeds of which have not covered the total debt and the balance remaining is unlikely to be recovered.

Kenya has a total of 42 commercial banks, 12 microfinance banks, one mortgage finance company, eight representative offices of foreign banks, 86 foreign exchange bureaus, 14 money remittance providers as well as three credit reference bureau. With all these financial institutions, many quarters have acquired that the Kenyan financial market is overbanked. Many have also acquired that the banking sector in Kenya is thriving but is the story about the thriving Kenyan banking sector a fallacy? Are Kenyan banks suffering in silent and are struggling to remain afloat? Are banks suffering as a result of nonperforming loans?

Many banks have released their full year financial results. Most of these banks, despite the fact that they made profits, the profits were either lower or not up to the expectations and the major reason given was non performing loans. Are people taking loans from Kenyan banks and then failing to pay back on time? Who are the people taking loans from the banks and failing to pay back: employees or customers?

In 2015, the International Monetary Fund said that Kenyan banks were not setting aside enough cash to shield themselves against the growing mountain of bad debts. In a report that was released on February 2015, the IMF said that although Kenyan banks were profitable then, there was a rising incidences of bad debts and that there was reason for the market to worry.

What is the real effect on non performing loans to the lenders?

Non performing loans have diverse implications on both the bank and the economy in general. The most often one is that nonperforming loans lead to the credit risk management of the lender. This implies that the whole machinery of the lender will majorly focus on the recovery procedures of their money other than concentrating on developmental issues of the bank.

Non performing loans also hinder the lender’s credit expansion that would otherwise lead to the productivity of the institution. This implies that with more nonperforming loans than what the bank can handle, then the bank may tend to lean towards risk-free investments so as no reduce the risk that maybe encountered from the loans. This often affect the flow of into the market for other productive purposes.

Non performing loans not only affect the bank but also the customers as well as shareholders and to some extreme incidences, the employees. When a bank has a huge base of nonperforming loans, it means that funds have gone out and they are not coming in. it simply means, the outflow is greater than the inflow. In such a case, a bank may even fail to operate for this will eventually affect its profitability and at long last, the survival of the bank.

So, who is to blame for the high rate of nonperforming loans in the Kenyan banks? Are they customers or the employees? Who will shield the Kenyan banks against this? Many banks have blamed customers for their woes emanating from non performing loans. Many have claimed that most of the customers who have taken loans from them fail to pay back on time or do not pay at all and this eventually affect their final profitability. But what is emerging is different from what seems to be happening. It is emerging that senior management of banks as well some employees take loans mounting to billions from the respective banks. This loans are not paid on time and then classified as nonperforming loans. Some banks are going through a financial turmoil due to cases of non performing loans, not from the customers but the directors and those who work in them. The question is, is the issue of nonperforming loans affecting some banks emanating from within?

Some of the banks feeling the heat of non performing loans include:

• Kenya Commercial Bank
• National Bank of Kenya
• StanChart
• Co-operative Bank
• CFC Stanbic and many others.

Who should the banks blame for non-performing loans? Customers or employees?

Article by Juma Fred.