Credit Management
Are Economic Conditions Accelerating Loan Default ?
By Wasilwa Miriongi
There have been a number of screaming titles in newspapers dailies such as “ Auctioneers paradise ” and “ mass default fears as CBK default rate hits 11 year high ”.
It is obvious that the prevailing economic environment has accelerated customer vulnerability for consumer organizations . A ‘ vulnerable ’ person when it comes to dealing with debts is anyone who finds it especially hard to deal with their debts because of their situation or their health . Financial difficulty may be an indicator of a change in personal circumstances ( e . g . a period of unemployment or business failure ).
Lenders must take into account that the distinctive features of each individual borrower , particularly with respect to industry , management experience and liquidity risk , are expected to influence the evolution of default .
If you have been following the economic trends you will realize that one cause of default is the high cost of living and salaries staying almost stagnant . This means that when it comes to loan repayment , many may have defaulted . The interest rate hike certainly results in an increase in the cost of loans for consumers and businesses alike .
On the other hand , borrowers have found themselves trapped following higher interest rates on loans , though initially attracted by relatively affordable interest rates and easy to get credit facilities from financial institutions .
The rise in the bad loans has a direct relationship with rising interest rates on commercial bank loans which have come down heavily on customers servicing the loan facilities within a deteriorating macro-economic environment
A Number of customers must have found themselves trapped when interest rates unexpectedly rise as lenders demand repayment on time . Those who are not as fortunate have no choice but to accept their lots ' impending doom under the gavel
This did not go without an alarm being raised the CEO of Kenya Bankers Association had warned against such a move reason being he had observed that could lead to a buildup in non-performing loans , and destabilization of the industry .
Burdened with overwhelming financial obligations and no way out , many individuals have joined the long list of defaulters hoping for debt relief programs and financial assistance on their impending journey toward credit recovery .
Beside the interest rates , another effect of the current economic environment has been the rising taxes , which has greatly affected the disposable incomes especially those with fixed incomes , in fact it is like being pinched from various source . The consumer disposable income seems to have shrunk by as much as 30 %.
The effect of high interest rates on customers
The increasing number of auctions in the real estate sector is indicative of the kind of financial struggles the borrowers are undergoing in an economy that has also experienced a number of job losses and almost stagnant salaries with an ever-increasing cost of living , notwithstanding the enhanced statutory deductions .
I would like to quote a leading bank CEO who is quoted as saying that “ Kenyan borrowers are being held back by economic headwinds including higher interest rates and increased taxes ”.
The high inflation , whereas we are focusing on a consumer is also a serious problem for Central Banks whose core mandate is to fight inflation , by using several tools to do this , such as setting interest rates which will influence the amount of money in the economy . When interest rates go up , then the cost of borrowing money increases as well , discouraging borrowing
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