Banks urged to review lending risk assessment

 

Central Bank of Kenya. FILE PHOTO | NMG

By CHARLES MWANIKI
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SUMMARY

• Banks in East Africa are highly exposed to bad loans, especially in situations of extreme economic shocks, due to weak client risk assessment tools, a survey by Deloitte shows.
• The economic fallout of Covid-19 uncovered flawed risk assessment by the lenders amid pile-up of non-performing loans(NPLs).
• The consultancy firm urged banks to factor extreme economic shocks in the risk evaluation guidelines to reduce their exposure to bad loans.

Banks in East Africa are highly exposed to bad loans, especially in situations of extreme economic shocks, due to weak client risk assessment tools, a survey by Deloitte shows.

The economic fallout of Covid-19 uncovered flawed risk assessment by the lenders amid pile-up of non-performing loans(NPLs).

The consultancy firm urged banks to factor extreme economic shocks in the risk evaluation guidelines to reduce their exposure to bad loans.

“Regular monitoring of loan performance by clients is essential in determining the trend of clients’ behaviour. This will allow banks to predict defaults early and set up mitigation procedures such as reduction of overdraft amounts or funding more where the business requires additional capital despite the overall market performance,” said Deloitte.

“Banks need to rethink old governance models and the way they are applied. They should prioritise a risk management approach that is holistic, all-encompassing, and embedded across the business to ensure a resilient foundation in the long term.”

The onset of the Covid-19 pandemic in March last year ushered in a difficult period for banks in Kenya, where the ratio of non-performing loans rose to as high as 14.5 percent in February 2021 from 12.5 percent in March 2020.

The lenders were forced to offer temporary repayment restructuring for loans worth a total of Sh1.7 trillion between March 2020 and February 2021, when the relief measures mandated by the Central Bank of Kenya (CBK) expired.

The analysts at Deloitte also pointed to a need for banks to assess which sectors or clients are most at risk of default, which will help in assigning the correct amount in loan loss provisions under different economic scenarios.

The current approach where some lenders assign risk based on a much broader perspective has had the effect of denying credit to segments or borrowers who are relatively low risk, with banks instead running to the blanket safety of lending to the government.