Is a Non-Performing Loan Distressful?

What exactly is a non-performing loan? And why do credit officers care so much about them? In today’s economy, a borrower is unlikely to repay a debt. This loan is called “non-performing loan” or NPL.

 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. They’ll all relay the same to you regarding bad debt. Any loan default is a non-performing loan.

 A debtor may run out of money or find themselves in situations that make it difficult to continue repaying the loan. This is a distressful situation for the creditor, too. The result is a blow to the bank’s financial performance—a high non-performing loan. Distress is a very common feature of Non-Performing Loans. In fact, the question “What is a Non-Performing Loan?,” is a major stress creditors have to deal with daily. Discover what happens when an NPL goes bad and how to deal with these loans.

What Makes a Non-Performing Loan Non-Performing?

A bank loan is considered non-performing when the borrower fails to pay. The borrower does not honor the agreed-up installments or interest. Take a non-performing loan as “bad debt.” It’s one of the most time-consuming aspects of credit management.

The risk of nonpayment is unacceptable. As a credit officer, you must step in to oversee the full credit process. That begins when you select and vet borrowers to ascertain their competency to receive the funds. Credit must go to only credit-worthy customers. You assess who will repay the principal amount and interest on time.

Want to Know Why Bad Debt is an Issue?

i. Bad debt results in a decline in a bank’s profitability

It’s taking a toll on many banks. Talk of decreased interest revenue, higher impairment costs, unrecoverable principal, poorer credit ratings, and higher funding expenses. If not effectively and proactively handled, there will be a decline in the banks’ cash flows and lending capabilities. And the bank must have a provision for bad debt to improve its solvency and capital adequacy ratios.

ii. Increased liquidity issues is another consequence of bad debt

Signs of a financial crisis mean securing more financing becomes much more difficult. The result? Exacerbation of liquidity problems. Financing projects becomes even more challenging.

The reason is simple: Bad debt results from vaguer debt recovery practices.

Customers are sometimes unable or unwilling to make payments when they are due. Your collection efforts may only recover some of the overdue amounts.

Vaguer collection activities lead to restructuring repayment plans. This doesn’t give debtors additional time to pay or resolve their debts on more manageable terms.

Think of it this way. The zero promises to pay. Your efforts, late reminders, notifications, or letters aren’t worth. All you do is print letters.You unprofessionally predict the best time to call, contact wrong clients, etc.

Essentially, you’ve got a 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. Done manually, all hell will break loose.

Banking Sector’s Changing NPL Dynamics Credit Managers Should Be Aware of

Bad Debt is Real: Central Bank of Kenya

Of cause, the value of defaulted loans reached Sh423 billion in 2020 (Central Bank of Kenya). This translates to 14.1% of the entire Sh3 trillion loan book. And a significant increase from the Sh351.73 billion in default at the end of March 2020.

CBK has indicated 11% of sampled banks had their NPLs rose. 70% remained unchanged. And 22% fell ( according to a survey on non-performing loans trend per economic sector in 2021).

Cytonn’s Q1’2022 results: Banks have High NPL Ratio

Banks’ weighted average NPL ratio fell 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 hike in loans in Q1’2022, compared to an 11.6 percent increase in Q1’2021.

However, a contrary report by the CBK 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).

What of Microfinance Banks’ NPLs?

Gross NPLs of two key microfinance banks hit above Sh 4 billion in 2021. And (SASRA) has revealed one of the leading Sacco’s total delinquency loans or gross loan portfolio hit 2.14% in 2021.

The Bottom line? Automation

Persuade me That Automation Solves Bad Debt Crisis

Clients Agree Automating Debt Recovery is the Way Forward

“Before automation, we’d receive a certain number of      accounts depending on what bucket to collect every month. There was between 1-30, 31-60, all in excel format.

Right now, we’re saving a lot of time. You can imagine, sending letters used to take 3-4 days. But right now, it’s just instant. Let’s say today I have 300 accounts. Even before I start calling debtors, they’ve already received email notifications, SMS, and letters.

I love the fact that it’s quite professional and wonderfully efficient! — we truly appreciate. “

— Current Client

Today, NCBA Bank stands on the cusp of one of our latest innovations in the collections industry. The bank’s collections have undergone massive changes since 2016, chief among them, reduced NPL. This enthusiastic adoption of automation has disrupted the bank’s long-held monopoly on its traditional debt collection model.

Why Automate Debt Recovery?
In brief
  • 100% transition from the manual issuing of repossession.
  • Information on repossession is sent to auctioneers on day 14 at the end of the due date.
  • From 4000 demand letters in two days to just clicks.
  • 60% relief on collection tasks. Only 40% for the credit officer.
  • Automatic and instant notifications. No late notifications
  • 60% of dues are paid before the due date (between 0 and 30 days). The remaining task is only 40%.
  • No more calling auctioneers to inform them to stop following a customer who has cleared arrears.
  • Cure rate increased by 80%
  • Reduced Turnaround Time (TAT) by 90% in just one month.

    So, will you Let Automation into your Debt Recovery Process?

    It’s fair to say the results being delivered to all our clients are real, tangible, and significant, which you can’t afford to ignore any longer. In fact, automation is becoming more prominent with the evolving business models as technology becomes mainstream.

    Contact Us

     Call +2547-202-632-768      Or      Email: