EDITORIAL: Banks must heed CBK aice and cut lending rates

Banks never cease to amaze. They are normally very quick to increase lending rates for borrowers when the situation favours them.

They have now raised the alarm on the rising risk of mortgage and personal loans defaults due to the increase in lending rates and the government’s delayed payments to contractors.

We urge them to follow Central Bank of Kenya governor Patrick Njoroge’s call to withdraw the notices they had sent their customers about their intentions to increase rates for existing and new loans.

According to Dr Njoroge, the situation in the market had now improved and there was no need to increase the rates.

We are anxiously waiting to see how quick the financial institutions will retract the notices that they had issued with speed to their customers.

One of the main reasons that there are high loan default rates in the country is because of the manner in which the banks shift the goal posts when it comes to the repayment rates.

It is said that the devil is always in the details. Many borrowers are normally oblivious of the fine print in the loan application forms that they fill and when the default notices start flying is when they realise just how deep they had sunk.

Many borrowers that have fallen foul of the banks’ whips have harrowing tales to tell of the way they are hounded by debt collectors and subsequently blacklisted by credit reference organisations.

Credit officers from 40 financial institutions have now warned that defaults on loans issued to individuals and real estate investors are set to increase after the sectors were hit by the recent increase in lending rates and slow payment of contractors by a government facing a cash crunch.

Lending rates recently rose to highs of 27 per cent from 19 per cent at the beginning of the year after the cost at which the government is borrowing from the local market more than doubled.

According to CBK, the banks now foresee increasing non-performing loans in the personal, household, building and construction, manufacturing, real estate, agriculture and trade sectors.

We concur with Dr Njoroge’s apt aice that the interest rates should go down as quickly as they had been increased by the banks.

While ours is a free market economy where interest rates are not capped, we urge the financial institutions to heed the CBK governors call and also expedite the lowering of the lending rates.

The economy would be greatly better off with clients servicing their loans stress free than with a high rate of loan defaults.

SOURCE: BUSINESS DAILY