Banks speak on rising bad loans

Majority of borrowers default on loans because they divert the money to other purposes, make wrong business decisions, or simply do not scrutinise the terms of offer, bank executives have said.

The comments follow an enterprise story published yesterday which showed the collaterals advertised in this newspaper for sale between January-June, this year, doubled the numbers auctioned within a similar period in 2019.

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The findings illuminated the rising problem of loan default, leading to borrowers losing property including family homes, to lenders, among them financial institutions, loan sharks and savings and credit cooperatives (Saccos).

We were unable to establish the amount of current non-performing loans and how it compares with the pre-pandemic period, but our internal count showed 2,076 foreclosures were advertised Daily Monitor in the first half of this year,nearly twice the 1,102 properties they advertised during the first six months of 2019.

The statistics translate into 346 assets being put on sale a month, or 12 of them a day, this year. The imminent forfeitures, based on our analysis, indicate individual borrowers losing big and small possessions, among them family homes, usually an acquisition using life-time savings.

Topping the list of collaterals are vacant land, land with building (residential, commercial and unspecified) as well as land with developments such as farms and workshops. Other items are motor vehicles and motorcycles, suggesting more boda bodas are losing bikes to lenders and, with it, employment.

Different bank chief executives and private lenders in interviews with this newspaper attributed the rising ban loans and foreclosures to multiplecauses, among them loan diversions, borrowing for consumption and luxuries such as weddings and fear to discuss repayment restructuring. 

Mr Micheal Mugabi, the managing director of Housing Finance Bank, said loans go bad from the onset when the intentions for use have not been made clear or borrowers divert the money.
“The number one cause for defaults is a diversion. Loans become bad from the moment of creation,” Mr Mugabi said, adding, “[Therefore], the purpose of funds should be made clear from the onset so that discipline is observed and the money utilised for intended use.” 

Asked how to stem the tide of increased property auctions to service loans, Centenary Bank’s managing director, Mr Fabian Kasi, proposed a close relationship between banks and customers so that when a client is  experiencing cash flow constraints, there is “a quick engagement for support, for example, with loan restructures”.

Mr Kasi added that it would be ideal to lend cautiously, especially to businesses in sectors that have been challenged by the prevailing economic conditions.

Several officials said the seizure and sale of collaterals is a last resort, which financial institutions abhor, but have to execute in desperate measures to recover their money.

In interviews for yesterday’s story, some defaulters accused lenders of being aggressive and hard-nosed while pursuing recovery.

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Mr Kenneth Agutamba, the corporate communications manager at Stanbic Bank Uganda, in a rejoinder noted that “the action of taking possession of a mortgaged property when the borrower fails to keep up their mortgage payments is defined by the laws of Uganda. 

“The process can continue until an appropriate buyer is found. Foreclosure is not a desired process by the bank and customer because it is a ‘forced sale’, [and] in most cases the lender will lose money,”  he said.

A foreclosure is a lawful process by which a mortgagee, such as a bank, recovers the amount owed on adefaulted loan by seizing and selling off forfeited property.

Mr Agutamba said whereas foreclosing is legal, banks only undertake it to avoid losing customer deposits and shareholder money. 

“Selling the property is, therefore, the last resort after all measures to support the customer to repay (including the grace period, and restructuring the repayment period), fail. At this point, the bank’s legal and recovery team may initiate the foreclosure process which follows a fair and transparent judicial process, and the affected client isnotified and given legal notice before foreclosure,” he said.  

In the event the auction exceeds the loan amount, Mr Agutamba said the balance is handed over to the property owner.

“Sadly, this is rare in most forced sale transactions as there is often limited time and few good buyers,” he said.

Financial institutions said they follow the procedure laid out in the Mortgage Act, 2009, in disposing of collaterals.

The law provides that where a mortgagor is in default of any obligation to pay the principal sum on demand, or any other periodic payment, due under any mortgage, the mortgagee [bank] may serve on the mortgagor a notice in writing of the default and require them to rectify the default within 45 working days.

“If the 45 working days elapse before any payment is made, then the mortgagee serves a ‘notice to sell’ for 21 working days in the form prescribed in the regulations. A sale cannot be done before the 21 working days have elapsed. The notice of sale should be served on the mortgagor,” Mr Wilbrod Owor, the executive director of Uganda Bankers’ Association (UBA), said.

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UBA is an umbrella organisation for licensed financial banks supervised by Bank of Uganda.
Part of the process includes advertising the collateral in a newspaper with wide circulation in order to bringing the intended auction to the attention of many potential buyers as possible.

“Before sale of the property, valuation should be undertaken to ascertain the current market value and forced sale value of the property. The valuation report shall not be made more than six months before the date of sale,” Mr Owor said.

According to lawyer, Mr Ivan Bwowe, the law prohibits sale of the collateral to a mortgagee (in this case bank), its employees, immediate family members, or people in the position of influencing the sale, due to possible conflict of interest.

“But where this [selling collateral to prohibited parties] must happen under any circumstances, court must be involved to satisfy that it is the best decision taken to get back the bank’s money,” he said.

Lender’s insights
A private money lender who preferred anonymity to protect their business, told this newspaper that many individuals who borrowed money defaulted, and selling off the collateral is the only feasible way to recover the finances.

“A contract is a two-party thing. In case of breach of contract, the person will follow what you agreed to in the contract. Otherwise, it will become a donation.”

He, however, said some borrowers acquire loans for projects with no returns. “Some people borrow to pay another loan, others for weddings. Someone has called me to lend them Shs10m for a wedding and attached their car. When people borrow, they should have discipline and take in what they can chew.”

“You get excited that you are getting a loan in 3 hours, but what are the measures?” the lender said, referring to inadequate due diligence by borrowers. 

The money lender also advised borrowers to study and understand the terms of the contract before rushing to append their signatures.

On the high interest rate charged, he said: “Why do you come to me if you think my interest is high? Go to the bank. The money lender does not come to you, you go to them. If I borrow money to lend to you, that means I am also paying money to a principal, in this case, a commercial bank.”

Failure to read and understand terms of a loan, according to Mr Martin Mpiima, another money lender, is a bigger issue resulting in defaults and distresses.

“Failure to read and understand the contract may come back to haunt you especially after failing to pay the loan. Those clauses [in contracts] have different explanations, hence, the need to understand them very well before signing the document,” he said.

Mr Mpiima said many prospective borrowers sign for loans in haste out of “desperation and the general lack of interest to read”.

“Read, read, read and ask questions when you need clarity,” he said in counsel to borrowers.

He also suggested that borrowers who do not understand specific clauses in a loan contract should seek services of a lawyer to help with interpretation.

*Additional reporting by Stephen Otage