Automation: Making Way for Credit Officers to Reduce NPLs
A non-performing loan (NPL) is bad news. A more serious one. Ask any credit and collection specialist, collecting agency and agent, attorneys, and everyone else in the lending business and they’ll all relay the same to you regarding aging receivables.
You’ve seen borrowers default. Reason being, they may run out of money or find themselves in situations that make it difficult to continue repaying the loan. The result is a blow to the bank’s financial performance—a high NPL.
What Exactly is Debt Recovery?
To recap, debt recovery is all about attempting to retrieve payments from debtors who have failed to pay their dues on time. It’s one of the most important, yet complex and time-consuming aspects of credit management. When the risk of nonpayment is unacceptable, debt recovery steps in—overseeing the full credit process. That begins when selecting and vetting borrowers to ascertain their competency to receive the funds. Credit must go to only credit-worthy customers who will repay the principal amount and interest on time.
Changing NPL Dynamics in the Banking Sector Credit Managers Should Be Aware of
The Central Bank of Kenya has reported that borrowers defaulted on Sh73.05 billion in bank loans in 2020, underscoring the severity of the economic situation caused by COVID-19. Additional findings also indicate the value of defaulted loans reached Sh423 billion, or 14.1% of the entire Sh3 trillion loan book, a significant increase from the Sh351.73 billion in default at the end of March 2020.
Further data demonstrates that, while some banks had an increase in NPLs during the time under study, a number of them experienced a considerable decrease in NPLs. This narrows down to specific commercial banks, microfinance banks, and Saccos. CBK has also indicated that 11% of banks had their NPLs rise, 70% remained unchanged, while 22% fell, according to a survey on non-performing loans trend per economic sector in 2021.
Kenyan Listed Banks’ Q1’2022 Results: Cytonn Analysis Report
Following the report on Kenyan listed banks’ Q1’2022 results, the Cytonn Financial Services Research Team conducted an analysis of the financial performance of the listed banks and highlighted the significant elements that drove the sector’s performance. Kenya now has 38 commercial banks, the same as in Q1’2022, but fewer than the 43 licensed banks in FY’2015.
However, the 2021 financial performance is distorted by the variable performance of 10 listed banks. Asset quality for listed banks improved during the period, with the weighted average NPL ratio falling by 1.0 percentage point to a market cap weighted average of 12.5 percent, down from 13.5 percent in Q1’2021. The increase in asset quality is due to a 17.2 percent increase in loans in Q1’2022, compared to an 11.6 percent increase in Q1’2021. Contrary to this report, the CBK release shows the total ratio of banks’ NPLs decreased to 14.1 percent in 2021 from 14.5 percent in December 2020. This is a measure of all banks’ credit risk and loan quality.
Further analysis by Cytonn indicates the lowest NPL ratio during the reporting period was 7.5% and the highest, 24.7%, with the lowest % Point change in NPL Ratio at 0.1% and highest at 4.2%.
Kenya Listed Banks Q1’2022 Report (Cytonn Financial Services Research Team analysis).
Meanwhile, two key microfinance banks had their gross NPLs hit above Sh 4 billion in 2021. For Saccos, the Sacco Societies and Regulatory Authority (SASRA) has revealed one of the leading Sacco’s total delinquency loans or gross loan portfolio hit 2.14% in 2021.
Despite all the positive appeals, there’s substantial evidence of the weakening strength of the borrowers’ ability to honor loan repayment. Banks’ profitability had fallen substantially as a result of the massive increases in provisioning by the end of September, with leading banks all issuing surplus warnings.
Rising NPLs: What’s the Impact?
A Decline in Banks’ Profitability:
High NPLs are taking a toll on many banks—decreased interest revenue, higher impairment costs, unrecoverable principal, poorer credit ratings, and higher funding expenses. If not effectively and proactively handled, this could result in a decline in the banks’ cash flows and lending capabilities. Moreover, the bank must have a provision for bad debt to improve its solvency and capital adequacy ratios.
Increased liquidity issues:
Signs of a financial crisis mean securing more financing becomes much more difficult. The result? Exacerbation of liquidity problems. Financing projects becomes more challenging.
The reason is simple: Vaguer practices.
Customers are sometimes unable or unwilling to make payments when they are due. Collection efforts may only recover some of the overdue amounts.
Essentially, vaguer collection activities can lead to repayment plans or debt restructuring that may not provide debtors with additional time to make payments or resolve their debts on more manageable terms. Talk of zero promises to pay despite the efforts, late reminders, notifications, or letters to clients regarding debts overdue. Printing letters instead of relying on auto-configured templates to auto populate letters. Unprofessional prediction of the best time to call, contacting wrong clients, among other
These are just a few of the vaguer practices that add to your huge workload. A properly organized credit department plays a critical role in managing accounts receivable portfolio risk to protect profits and prevent potential losses. This is to help you remain more productive in your career. But if you do this manually, all hell will break loose.