BY VICTOR ADAR
It is easy to raise a small percentage, say 25%, of the value of an asset and pay the rest on monthly instalments. It sounds good especially to first time buyers. But what happens when things fall apart and the centre cannot hold? How do you ensure that your asset is not repossessed and put on auction?
The strategy used by lenders has always been reactive. Banks, SACCOs and micro-finance institutions generally engage services of third parties in a bid to recover a range of loans. Borrowers have borne the brunt of financial institutions after defaulting on loans with a majority choosing to battle it silently.
A decade ago, lenders could sell off a seized asset at a throw away price. Those days, there was a joke in town that Kenya is an auctioneers market. Then a fresh law completely changed the scenario. Section 97 of the Land Act 2012 has turned out to be a big blessing to borrowers as it bars banks from selling repossessed assets at below 75% of the current market value.
“A chargee who exercises a power to sell the charged land, including the exercise of the power to sell in pursuance of an order of a court, owes a duty of care to the chargor, any guarantor of the whole or any part of the sums advanced to the chargor, any chargee under a subsequent charge or under a lien to obtain the best price reasonably obtainable at the time of sale.” Sec 97(1) states.
According to Dennis Ndiritu, a commercial lawyer, the section doesn’t aid customers but merely protects their right to property. Before the law was enforced, defaulters were left with the short end of the stick. Lenders would sell off a piece of land at a lower rate to recover their balance not factoring in the value. Today, a debtor can sue should his or her asset be sold at below current market price.
“When your land is supposed to be auctioned, it is supposed to be auctioned at market value. The excess should be returned to the landowner and the cost of the seizure is borne by land owner. If it’s sold at below market value it means in the contract that you are being played. So the section is definitely good to consumers (property owners). It limits the scope of the powers of a bank; they can’t auction land as they want. If the owner of the land can prove that the land has been sold by a lender at a cost above the market price it’s okay to go to court,” says Mr Ndiritu.
Experts say it is important for lenders to take a proactive strategy by integrating new ways of handling distress sales into their future business plans and investment strategies in order to avert future challenges. In fact, banks ought to completely rethink the route of engaging the affected defaulters going forward thanks to the evolution that the pandemic has presented.
A Nairobi car yard owner who spoke on condition of anonymity for fear of losing a contract with the lender that outsources work to her says the uptake of assets on auction has gone up.
“All I can say is people buy repossessed cars and business is good. Once we’ve sold and recovered the arrears in question excess is given to the defaulter after storage charges and money spent on advertisement have been subtracted,” she says.
By her narrative, it appears that the pandemic, though a challenge, has also brought joy. It has translated into a boon because “people fear buying cars from individuals” as some are not straight forward, and one can easily be swindled.
“You might end up buying an asset whose documents have been used to secure a loan facility as opposed to a bank repossessed asset which are clean. Banks carry out due diligence. Fellow dealers also buy cars from auctions, put a mark up, and re-sell. I sell auctioned cars to so many dealers and individuals,” she says.
Quite telling is the sharp increase of newspaper adverts (many being repeat adverts) blaring auction notices. Reliable sources reveal that the targeted assets have remained non-attractive thanks to the fact that potential buyers are broke and can’t manage to pay up the bid price – the price of a seized asset is based on valuation so the minimum bid price is generally set based on that.
But there is the other side of the coin. Some lenders have tried as much as possible to come up with innovative ways such as offering debt relief to customers whose revenue streams have been affected by the pandemic during this critical time.
KCB Bank Kenya, for example, has restructured facilities worth over Sh115.1 billion to cushion customers against the effects of the Covid-19 pandemic, a move that have seen customers apply for their loans to be restructured, credit lines expanded and loan tenures extended to keep them financially afloat.
So far, the bank has approved the restructuring of Sh91.3 billion worth of corporate loans and an additional Sh20.4 billion in loans to mortgage customers. It is also interesting to note that the bank’s doors are still open to customers seeking rescheduling of loan payments on their personal, business, corporate and housing loans for disruptions caused directly by the Covid-19 pandemic. All that is done upon request and on a case-by-case basis. This highlights the economic hardship and challenge that companies and individuals are already facing.
“We made a promise after the pandemic that we would walk the difficult journey ahead hand in hand with our customers. We are therefore offering relief to our customers, upon application so that they are able to weather this storm that was unforeseen the world over. We believe this will not only cushion businesses but create a multiplier effect that will ultimately help to save jobs,” says Joshua Oigara, KCB CEO and MD.
For personal check-off loans and scheme loans, upon request by the individual borrower and the employer (corporate) respectively, the customers can enjoy an extended moratorium benefit for a period of three months.
Residential and commercial mortgages customers are getting a freeze on the principal or both principal and interest for three to six months with interest being capitalized monthly as it falls due. However, the Bank may still extend the moratorium for a maximum of 12 months, depending on the severity of the Covid-19 effects on the customer’s business.
On the other hand, micro, small and medium-sized enterprises (MSMEs) can opt for repayment moratorium of three months; waived negotiation fee for restructured facilities; and extension of period for up to three months as part of their debt relief accommodation.
Corporate customers can opt for capitalization of principal and interest in arrears as at March 31, 2020, as well as capitalization of future interest for three to six months based on cash-flows. Further, the bank avails a three to six months’ moratorium on principal on deserving sectors, and meets all the costs related to the extension and restructuring of loans.
All these are happening at a time when data from the Central Bank of Kenya show that the percentage of gross non-performing loans to the industry’s total loan book grew to 12.7% in February from 12% in December 2019, a trend that might adversely affect banks’ balance sheets.