Banks on the spot over filing false reports to credit reference bureaus

BY KENNETH KWAMA

Some banks could be submitting inaccurate information about their customers’ credit worthiness to Credit Reference Bureaus (CRBs).

This effectively immobilises those servicing huge loans from moving to rival banks willing to buy out such loans, Financial Journal can reveal.

There are also doubts over the accuracy of some reports in CRBs custody after it emerged that many customers do not bother to check information given out by banks about their credit worthiness. Several deserving customers have been denied loans based on such erroneous reports.

For instance, Nathan Kwinga* realised he had fallen prey when his request to borrow a business loan from a local bank was denied due to an adverse report from a CRB. The bank told him he had been listed as a delinquent despite the fact that he had been taking loans and servicing them as required and promptly settling his bills.

Rude shock

"I approached the bank whose interest rates were much lower in a bid to have it buy out a loan I was servicing from my bank. The second bank had no objections, but things changed when I told my bank about my intentions to transfer the loan to another bank," says Kwinga.

When he went to the bank that was supposed to buy out his loan, he was informed that they had conducted a background check on him and the deal could not be executed because he was in the red.

Kimani wa Kanyiri*, a civil servant who was servicing a loan with a multi-national bank realised he would not complete repaying his bank loan in December last year after his bank recalculated the interest on his existing loan and stretched the repayment period. The bank loaded the recalculated balance on his loan, which was nearing its termination, leaving him with heavier repayments to make.

Kingwa says that when he demanded for explanation on why he could not top up his loan, he was told that his bank had forwarded a negative report about his credit worthiness, effectively blocking him from transferring his loan to the cheaper bank.

Two other customers told Financial Journal they have had similar experiences.

Two of the banks that were adversely mentioned had not responded to our enquiries by the time of going to press, but the umbrella body representing bankers, the Kenya Banking Association (KBA) says it is not aware some banks could be using existing loans in their portfolio to lock in customers.

"Banks cannot just list your name with a CRB without reason. There is possibility that in such cases, there was dispute about repayment or other fundamental issues. A bank can tell the customer that you owe us this amount and the customer can say no," says KBA’s Chairman Habil Olaka.

Financial history

"But in cases where our clients find their names listed with the CRBs by mistake, they have a fall back because they can demand that their names be expunged from such records," says Olaka.

Before the bureaus became a reality, banks looked at clients’ account financial history, at least for the last six months before deciding whether they were eligible for credit facilities or not.

For customers to qualify for loans, the history was supposed to show high level of activity, both debits and credits. The person applying the loan was then scored using debt service ration (DSR). DSR is arrived at by dividing net monthly income by total monthly commitments.

If the score is above a certain figure (in most cases above 1.25), the borrower stood a chance of being given a loan.

Generally, lenders make credit granting decisions based on both ability to repay a debt (income) and willingness (the credit report) as indicated in the past payment history. These factors help lenders determine whether to extend credit, and on what terms.

In countries like the US, if a consumer disputes some information in a credit report, the credit bureau has 30 days to verify the data. Over 70 per cent of these consumer disputes are resolved within 14 days and then the consumer is notified of the resolution.

In Kenya, there is now widespread concern that information in credit reports is prone to errors. But KBA and representatives of the bureaus say that there are laws to resolve both the errors and the perception of errors.

Metropol Credit Reference Bureau Managing Director Sam Omukoko says that the information held by CRBs is usually open to scrutiny by customers and in cases where there are disputes, the bureaus usually contact the concerned bank(s) for clarification.

"The law requires that the customer be contacted within 15 days after lodging of the complaint and there has been complete compliance," says Omukoko.

But some banks have not been reconciling their customers’ loan accounts according to the repayment schedules agreed before the loans are granted.

Last year

Ruth Mwangi*, a teacher obtained a loan of Sh500,000 from a bank a few years ago. The loan payment period was supposed

to be 48 months at a monthly installment of Sh12,827. She managed to repay the entire amount and cleared October last year.

"But I was surprised that see my new year dampened by a fresh loan deduction that was made in December," she says. This was despite the fact that in November the loan was never deducted signifying that even the bank was aware she had cleared her loan.

"When I went to the bank’s Nyahururu branch, the manager informed me that I had an outstanding loan balance of Sh65,000," says Mwangi. "This was a shocker to me because I knew I had cleared the loan," she says.

So far, credit information sharing has been limited to negative information, meaning customers with good loan repayment records like Mwangi can not benefit from the CRBs whose introduction into the country was believed could help lower the cost of credit.

According to Olaka, banks have fully embraced CRBs and are utilising their services to get information about loan applicants.

*Names of sources have been changed to conceal their identity.

When account holders can be blacklisted

IF you are the kind who leaves a lot of money idle in your savings accounts, you have probably realised that it earns very little interest, however, much it is.

In Kenya, depositors have always complained about little return on savings, a situation that could persist for even longer periods because both customers and consumer organisations seem to be giving very little attention.

Different banks employ various ways of calculating interest on their customers’ savings account. While some prefer to calculate the interest on running balance on a daily basis, others pay interest on the average amount in a customer’s account at the end of the month or the least balance held in an account at the end of the month.

Although interest paid on savings accounts vary, generally the total yield stands at 3.5 per cent per annum or 0.29 per cent per month on the minimum balance in your savings account between the 10th day of a particular month and the end of that month.

"What is a little unfair here is that interest is paid on the minimum balance in your account when it is likely to have any money," says Janet Jumah a nursery school teacher, who operates two different accounts in a multi-national bank.

Jumah says she opened the other account after being lured by a promotion that stated the extra account would earn higher interest rates on savings, but she later abandoned it when she realised this was not true.

Another customer opened a similar account hoping to reap big on interest, but was disappointed when he realised his dreams would not come true.

"The account has been dormant since 2006 and I fear that the bank could have forwarded the information to credit bureaus. It has been sending statements the last five years and the hole is big," says the customer who requested not to be named.

But chief executive of the Kenya Bankers Association, Mr Habil Olaka, says that information on dormant accounts are not usually forwarded to bureaus unless such accounts were being used to service non-performing loans before they became dormant.

"If the account is dormant and the customer was using it to service a loan, then such information can be forwarded to the bureaus," says Olaka.

Olaka says Banks have also started raising interest rates on savings and some are paying as high as 10 per cent on the amounts saved.

"It cannot be commensurate with interest rates, but in recent past the situation has greatly improved. It follows a cycle," says Olaka.

With more 5.7 million accounts, accounting for over 57 per cent of all bank accounts in the country, Equity is the largest bank in the region in terms of customer base.

The deposit interest rate in Kenya was last reported at 4.56 per cent in 2010, according to a World Bank report released last year. The deposit interest rate in Kenya was 5.97 per cent in 2009, according to anothet World Bank report, published in 2010.

Deposit interest rate is the rate paid by commercial for demand, time, or savings deposits.