Banks are gradually adopting risk-based lending

Capital markets

Banks are gradually adopting risk-based lending

A customer is served at the Kenya Commercial Bank (KCB) in Nairobi on January 24, 2018. PHOTO | SIMON HAND | AFP

Bank lending rates have yet to be fully adjusted to borrower risk ratings as lenders adopt a gradual rollout to avoid shocking the credit market which is still recovering from the downturn caused by the now repealed rate cap and Covid. -19.

More than half of banks already had their risk-based models approved or signed off by the Central Bank of Kenya (CBK) by the end of July, allowing them to vary interest on credit according to risk profile of a borrower, with the expectation of improved access to credit across the economy.

By the end of June, 28 lenders had adjusted their overdraft, personal and commercial loan rates by 2.4 to 4.8 percentage points from March 2022 rates.

Some lenders charged up to 16.4% for business loans in June and 16.8% for overdrafts, while personal loan rates rose 2.4 percentage points to 14.3%.

The increase, however, is expected to amplify in the coming months once they fully roll out the risk-based pricing model, especially for small business loans which are considered riskier borrowers than businesses.

“Risk-based lending has not been fully implemented because you don’t want to cause distress to customers. It will be implemented gradually,” said a bank executive who declined to be quoted. .

Lenders had endured a prolonged wait for approvals – which the CBK said was partly due to the submission of unsatisfactory plans – which led most of them to lend at a maximum of 13% even after the lifting. of the Lending Rate Cap Act in November 2019.

They therefore relied heavily on pumping money into risk-free government securities at rates between 10 and 13.5%, meaning that private sector loan growth remained below the pre-rate cap level. 8.3% until December 2021.

Loans to the private sector have increased steadily this year, from 8.8% in January to 12.3% in June, helped by increased demand for loans in transport and communications, manufacturing, trade and durable consumer goods.

Proponents of risk-based lending expect that by being allowed to charge a premium to cover loans to customers deemed riskier, banks will then open their portfolios to small businesses and individuals, who find it difficult to access formal credit.

However, while there is an increase in risk pricing model approvals, lenders are concerned that they still may not have some of the supporting data needed to accurately estimate a client’s risk profile due to the moratorium. on the negative list of borrowers with loans below 5 million shillings. by the credit reference bureaus (CRB).

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