Equity bank locks out 700,000 loan accounts in the year of rate caps

Equity Bank CEO James Mwangi takes Ms Sally Chepkorir, a shareholder, through the financial results for the year ended December 2017. [Wilberforce Okwiri, Standard]By Patrick Alushula In summary
Micro-SMEs and agriculture suffered most with non-performing loans (NPLs) ratio at 15.4 per cent and 8.9 per cent respectively Total number of customers that held loans declined from 1.2 million to 680,000 borrowers Equity Bank CEO James Mwangi has disclosed that he made a decision to be
“really brutal a little bit” and deny loans to about 700,000 customers.
This is after lenders were denied free hand in pricing loans. While speaking to investors through a teleconference call to highlight the 2017 financial performance, Mr Mwangi said the bank made a rational decision to invest more in Government securities and shun segments whose risk was beyond 14 per cent.
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“We had to do real market play. So essentially we could only lend to those whose risk could be accommodated within our risk pricing.
We didn’t want to pretend to be good because you can’t win against a market,” he said. As a result, the Equity boss says that the total number of customers that held loans at the end of the year from the date the interest capping was instituted had declined from 1.2 million to 680,000 borrowers.
The segment of customers that suffered most were micro-SMEs and agriculture where non-performing loans (NPLs) ratio was at 15.4 per cent and 8.9 per cent at the end of the year. “We were really brutal a little bit, but the check off system was left mainly to the Defense Forces — that explains why we lost 700,000 loans during the year,” Mwangi told investors in a teleconference that was later transcribed to the press.
He argued that the two segments are labour-intensive since some involve small loans averaging less than Sh20,000. Even though he admits that he was worried the decision would hurt the brand, the bank managed additional one million customers in the year. Avoid fake news! Subscribe to the Standard SMS service and receive factual, verified breaking news as it happens. Text the word 'NEWS' to 22840 The year saw the Kenyan subsidiary post negative loan growth as the group’s loan interest income shrunk by 21 per cent to Sh34.1 billion. The group announced a 14 per cent growth in net profit, swimming against the tide that had eroded its peer’s profits. The bank capitalised on other subsidiaries where there was no cap on pricing loans. This, the CEO explained was the reason behind the overall growth of four per cent in loan book. Subsidiaries contributed 14 per cent of the total gross profit of 2017, up from seven per cent in the previous year. Tax benefit The loan book in Uganda grew the fastest (56 per cent) followed by DRC Congo (28 per cent) and Rwanda at seven per cent. During the year under review, private sector credit growth in the country declined from a peak of about 25 per cent in mid-2014 to 2.4 per cent by December 2017. ALSO READ: Equity Bank defies rate cap to post Sh19b net profit Mwangi said the bank found itself attracted to a “very rational temptation” to invest significantly in Government securities as Treasury continued to issue infrastructure bonds with tax benefit. The bank grew Government securities portfolio by 27.2 per cent from Sh100.6 billion to Sh128 billion.
As a result, the Treasury contribution of total income increased to 25 per cent from 16 per cent in the previous financial year. While 70 per cent of the Treasury income came from Government securities, 23 per cent was from forex and bond trading.
“This is income without recourse because there are no provisions. And given that we had pulled out from the lower segment of micro, the concentration of the book was corporate and SMEs constituting almost 68 per cent of the total loan book,” said Mwangi.
 Too risky The CEO hopes that rate caps will not be in place by September so that he can re-open the taps of credit to the segments he deems too risky.
Unlike most of his peers who are calling for reforming of the cap, he wants it out in entirety. “Our recommendation and consequently our position is that there is no point in keeping the caps and there is no room for amendment. It is a complete revocation of the amendment,” he argues.