Pain for borrowers as CBK ends repayment holiday

Central Bank of Kenya Governor Patrick Njoroge. [David Gichuru, Standard]

The Central Bank of Kenya (CBK) yesterday threw borrowers into the shark-infested deep sea after it ended the emergency measures that had allowed them to restructure their loans.

This means the one-year holiday in which borrowers got reprieve, some of who lost their jobs, have ended and banks are at now liberty to book their loans as non-performing and subsequently go after their securities if they continue defaulting.

“Consequently, in accordance with standard procedures, borrowers whose loans were performing before March 2, 2020, but were restructured and subsequently went into arrears, will have three months (up to June 3, 2021) to regularise their loans,” said CBK in a statement yesterday.

Days after the country announced its first case of Covid-19 on March 13, last year, CBK struck a deal with banks that allowed loans that were not in arrears, but whose borrowers were negatively affected by the pandemic, to defer payment for between six and 12 months.

CBK noted that with these measures, borrowers were provided with restructuring options including an extension of the repayment period, a standstill on payment of principal or interest and waivers on interest or fees.

“The measures have provided space to borrowers to ride through the pandemic, mitigate job losses and pivot their business models to the new normal,” explained CBK.

The financial regulator noted that most of the restructured loans were already being serviced, with the outstanding restructured loans as of the end of February amounting to Sh569.3 billion, or 19 per cent of the total gross loans.

Since March last year, loans valued at Sh1.7 trillion, representing 57 per cent of the banks’ loan book, had been restructured.

“Over 95 per cent of the outstanding restructured loans are being repaid in accordance with the restructured terms,” said CBK Governor Patrick Njoroge.

It said with the end of the one year for the emergency measures on extension and restructuring of loans, the standard procedures for loan classification and provisioning would apply.

The measures might hurt borrowers and lenders. With the economy yet to recover from the after-shocks of the Covid-19 pandemic, banks might have to book most of their loans as bad loans.

Provisioning for them will eating into their profitability. Banks have the option of trying to recover the loans by auctioning some of the borrowers’ assets. But a tough business environment means that there will be fewer takers of those assets.

Nonetheless, CBK which noted that these emergency measures provided banks with time to build additional capital and liquidity buffers to take them through the pandemic period and beyond, will now expect them to start provisioning for such risky loans.

“Specifically, banks will from March 3, 2021, assess the performance of all restructured loans that were performing before March 2, 2020. The period for determining the performance of all the restructured loans will begin on March 3, 2021.”