Hunter becomes the hunted: Banks take on bad debtors

Kampala.

Life was normal for Charles Kibuuka, (Not real names) - One of Kampala’s known commercial property owners. His businesses were doing well. He was looking forward to seeing one of his buildings change the sky-line on Kampala Road.

About seven years ago, it was difficult to get a bank loan from the 14 commercial banks. But tides have changed. The number of commercial institutions has doubled, compelling a competition for customers.
Because of this, Kibuuka was able to get Shs2 billion loan from one commercial bank to complete his magnificent commercial building.

Initially Kibuuka had invested Shs4 billion, which he used to acquire the prime plot and start the initial stages of the building. Life was good -he could afford to service his loans. Getting a loan at 16-18 per cent interest was affordable and flexible. He could afford to have two or more loans from different banks-generally that is how life has been. But 2011 was a dreadful year because the global financial and economic crisis hit Uganda’s economy. Inflation shot up, prices of commodities went wild, consumption went down and interest rates jumped. This was bad news for Kibuuka and other businessmen.

Kibuuka could not afford to meet his monthly loan repayments to the banks. His businesses were at risk. A few weeks ago, his fears came to pass as the bank took over his dream building along Kampala Road and placed the building in receivership. Kibuuka’s case is one among several receiverships cases happening, as banks attempt to recover their money from non-performing loans.

Reliable information from the business circles in and around Kampala shows that a couple of shopping malls, arcades, homes and businesses have been put under receivership; others have been taken over already. According to information from Bank of Uganda (BoU), non-performing loans have almost doubled.

Dr Adam Mugume, the BOU director research, says: “True, non-performing loans in banks have increased from 2.2 per cent as of December 2011 to about 3.4 per cent in March 2012.” But he adds that by all standards, this is still better than international standards. EAC region average is about 12 per cent.

Default origin
Experts attribute this crisis to the fierce competition among banks. Loans were offered to many people who previously may not have been qualified. BoU records show that, loans have been growing since 2007, especially in mortgage, construction and real estate.

“Loans to building, mortgage, construction and the real estate sector were Shs226.5b in December 2007, Shs586.6b in December 2008; Shs639.3 billion in December 2009 and Shs1065.2 billion in December 2010,” Mr Mugume adds.
This growth continued last year. By last December, a total of Shs1465.3 billion worth of loans had been issued in these sectors. By May 2012, it had grown to Shs1674.4b.

Earlier, BoU report show that bank assets quality had improved. The level of non-performing loans (NPL) in the banking sector reduced by 30.5 per cent between June 2010 and June 2011. As a consequence of the overall improvement in loan quality, banks were able to reduce their loan-loss reserves by Shs24.7 billion to Shs77. 2 billion in the year to June 2011.

Mr Michael Malan, the managing director of Compuscan-the company which operates the Credit Reference Bureau in Uganda said: “We see all forms of debt activity on the CRB, most notably was the early reduction of interest rates with the advent of the Central Bank Rate (CRB), helping banks to make safer lending decisions, which corresponded with an increase in lending.” He adds: “Subsequently, we have seen increases in exposures and borrowers falling into arrears as they battle to service their loans.”

He also says the CRB is assisting banks to make more informed and more reliable lending decisions by linking all exposures together of all loans. Banks need to know the exposure of the loan applicant so that they can offer a fair rate for the perceived risk.

“We agree that it became easy in 2011/2011 to acquire funds, and this was a part of the intended benefits of the CRB. Our specific function is to highlight how people are managing all their loans, to ultimately make access to credit easier and more affordable,” Mr Malan says.

“We also have a parallel focus and that is to protect borrowers from going deeper into debt.It is our opinion that if it were not for the increased interest rates, people may have become even more indebted, getting access to “easy” money. The inevitable market shock fuelled by inflationary pressures could have been even worse were it not for the CRB’s information.” “Lending is a risk game and all risks were vetted, but no-one could forecast what was to transpire with inflation”.

Inflation climbed in less than 12 months from 1 per cent to 30 per cent. Living expenses were notably skyrocketing - people needed cash to continue the same standard of living they had become used to. “But the market never reacted and borrowing continued as interest rates soared at banks,” Mr Malan says.

In parallel the Dollar against the Shilling was at the highest (2,900 in September) and BOU issued a 25-year bond to attract Foreign Direct Investment (FDI). This worked and helped stabilize the dollar temporarily.
BoU introduced the CBR to curb inflation as a monetary policy measure to increase the overall cost of borrowing and reduce the loan volumes in the country.

With the CBR not having the desired effect of curbing money supply, BoU continued to raise the rate until it was cheaper for banks to sell stock of foreign currency on the open market than to lend to the never ending hungry borrowers.

Experts say, given the focus on increasing assets on the balance sheet -debt from loans needs to be collected as soon as possible. So banks across Uganda have tightened their recovery methods, shortening the days they used to allow people to make repayments.

At the peak of this, traders were up in arms over the cost of finance. In order to seek redress, they petitioned the President, who intervened. Since then, there has a gradual decline in the CBR. Today the CBR is at 19 per cent although still up from June last year- but marginally better than where it had been.

Dr Mugume says most defaults have been in property related businesses- people had borrowed to invest in property businesses whose demand had declined because of both global and domestic problems. “Usually these give out properties as collateral for such loans. In this case, the problems are coming from the slowing down of the economy and naturally that is expected when you are fighting to control inflation that had risen to 30 per cent before dropping to 18 per cent,” he adds.

Experts say the stock turnover for businesses has drastically come down as seen from the levels of imports and taxes paid. Looking at Uganda Revenue Authority monthly report, there has been a shortfall in some months on domestic tax collections.

In May, there was a Shs7.66 billion shortfall in the Domestic Tax revenues collected. In this month, a total of Shs2,800.16 billion against a target of Shs2,807.82 billion was registered. Net domestic tax collections for April 2012 amounted to Shs252.53 billion against a target of Shs257.26 billion, registering a net deficit of Shs4.73 billion. This must have had impact on people who borrowed expecting to repay after selling and yet they had given their properties as collateral for the loans.

“Whether the interest rate is 20 per cent or 30 per cent, naturally without business recovery such people cannot repay the loans. The problem is therefore slowing down of activity rather than interest rates,” Dr Mugume says.
As inflation tightens its noose, Uganda Banker’s Association’s managing director, Mr Emmanuel Kikoni said: “As the association we came up with a collective view that individual banks were going to look at the individual clients and consider to re-negotiate or restructure the loans to save the situation”.

A couple of commercial banks such as Housing Finance, Centenary Bank and KCB whom Daily Monitor talked to, admitted having loan payment issues with their clients. To keep the relationship, they had to restructure the loan repayment systems.

Mr Nicholas Okwir, the managing director- Housing Finance, said: “Because of the effects of the inflation challenges, we have had to sit down with some of our clients and restructure the loan repayments”.
Kenya Commercial Bank’s loan portfolio currently rated at about Shs150 billion, has not experienced significant deterioration in the asset quality.

Problem solving
“We have not put any companies under receivership and we continue to work with a few distressed clients to find amicable and mutually beneficial approaches to regularising their facilities,” Mr Anthony Kituuka, KCB’s marketing manager, said.

Mr Kituuka adds that such efforts include restructuring facilities, extending grace periods and in some cases extending the entire loan period. “Repayments are good. Average loan is between 3 and 5 years and clients are meeting their obligations. They are not expanding unnecessarily, however, and being cautious,” he says.

At Crane Bank, deputy managing director, Mr Jay Kumar, said they have realised a drastic drop in demand for new loans and loan re-payment has too suffered significant delays.
“Transactions have slowed down drastically in the past year as there are few buyers and sellers,” Mr Kumar said.
Ripple effects from Europe, he said, were affecting Uganda because of insulation.
Though defaulters have been registered, he said it is not yet at an alarming rate as most are small scale salary loans.
Ms Prudence Byarugaba, a senior associate, Global Corporate at Standard Chartered Bank Shares, says their total wholesale borrowing portfolio grew by 40 per cent from $1.26 billion in December 2010 to $1.76 billion in December last year and remains at the same level at half-year.

Sectors that grew
“Growth has mainly been registered under the manufacturing, commerce and services sectors where requirements have increased due to underlying business growth,” she explains. The bank has boarded some new clients in 2012, but has also seen reduced utilisation under some existing clients following swapping of debt with equity to manage rising financing costs.

The bank has completed some significant equity injections in recent months especially among the multinationals to recapitalise their businesses and fund new projects. “This has also been done to partly refinance existing debt in view of the higher local currency interest rates,” Ms Byaruhanga says.

She said at the beginning of this year, some customers experienced delays in settling their outstanding accounts, and this was mainly attributed to port congestion at Mombasa and delayed payment by government departments.
In spite of this, the bank has not recently issued any receivership notices.

One would say, if Kibuuka was a customer of the above banks, he would not have lost his building. But with times being so tough and it being less easy to make the repayments on time, bankers say they will step in and will take the collateral. This is not because they want to, bankers say, but because they have to watch over everyone else’s money.

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