December 7, 2021


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How banks can leverage technology to rebuild and maintain a healthy credit portfolio

4 min read

The quality of a bank’s loans is the determining factor in its success. Covid, on the other hand, has ripped through institutional loan books, driving increasing the share of loans with stopped payments and left banks earning significantly less than they expected from their existing lending.

Kenyan banks have shown extraordinary resiliency in the face of the economic crisis. By the end of 2020, over 15% of Kenyan banks’ loans would be classified as ‘non-performing,’ meaning they have gone three months or more without repayments or service. However, that increase from 12% at the end of 2019 could have signaled the start of a much worsening trend.

Instead, our banks modified and rescheduled more than a third of their loans, totaling Sh1.1 trillion, providing payment vacations, extending the period over which loans might be repaid to reduce monthly installments, and waiving interest and fees. Most of those who suffered serious setbacks as a result of the epidemic were able to regain their footing and begin debt servicing as a result of the relocation.

For the first year of the pandemic, banks were also helped by the Central Bank of Kenya’s relaxed restrictions, which meant they didn’t have to have as much liquid cash or capital on hand. Those emergency measures were repealed in March this year, when most loan books had stabilized, meaning banks now had to reach the same levels of capital adequacy as before the pandemic.

Client activity has slowed, loan growth has slowed to barely 7% per year, and the cost of impaired loans has increased. It’s a concoction that’s putting pressure on banks profits. Indeed, average year-end profits of the country’s Tier 1 banks decreased 25.7 percent from Sh12.2 billion in 2019 to Sh9.1 billion in 2020. Furthermore, according to analysts, most banks will participate in additional debt relief in 2021 in order to prevent more loans from becoming delinquent.

Despite the fact that the sector is dealing with so much change and turmoil, its own health is essential to the country’s overall health.

“Banks have a critical role to play not only during the crisis by providing temporary relief to businesses and households, but also during the recovery by supporting economic activity and facilitating the structural transformations engaged by the pandemic,” the International Monetary Fund said in a June report on banking in Sub-Saharan Africa.

This function, as well as the preservation of banks’ own growth and profitability, necessitates more comprehensive loan origination and management solutions than previously available, as well as an overall improvement in portfolio health: this is where banking technology can help.

The loan decision-making processes in Kenya have significantly evolved in recent years as banks have updated their technology to leverage alternative data sources, as witnessed in the mobile banking lending industry and with the country’s three credit reference agencies.

Credit decisions for SME and corporate loans, on the other hand, remain a lengthy process in which information is manually gathered and analyzed over weeks to determine the borrower’s creditworthiness.

Leading banks have lately used technology, such as our CreditQuest, to automate credit origination and manage credit workflow, appraisals, paperwork, customer ratings, and credit judgments in response to the need to eliminate such inefficient operations. This system brings together all current and historical credit data on a single platform, offering bank analysts a real single customer view of credits and collaterals.

It also enables banks to automate financial statement analysis, as well as produce critical ratios, predictions, and peer group comparisons for corporate loans, with features that analyze performance and provide early alerts to banks of potential difficulties. They can, for example, compare a loan application from the hospitality or ICT sectors to its peers to evaluate how their relative performance compares to what their peers have delivered.

With this level of knowledge, banks can price for risk instead of offering a one-size-fits-all borrowing interest rate, with low-risk borrowers paying lower rates than high-risk borrowers.

Banks that use this technology have reported a decrease of 80 percent in credit turn-around time and a 50 percent reduction in expenditures. Reduced processing costs are a positive addition to profitability for banks that are absorbing higher loan impairment charges elsewhere.

With a new level of insight into concentration and exposure, as well as the capacity to slice and dice data, such precise data allows banks to manage their whole credit portfolio in a more sophisticated way, offering up new opportunities for the banking industry to attract more respectable borrowers.

Increased lending is what shareholders and the economy need from banks to restore their earnings and rebuild our post-Covid economies. While recent trends indicate that many banks have grown their holdings of government assets as a means of reducing risk and achieving profits, such securities often have tighter margins than private sector lending.

More importantly, government investment, whether recurrent or capital, cannot deliver GDP growth and regrowth while the private sector is unable to borrow.

As a result, our path to recovery must include private sector finance, as well as enhanced lending through automation that will safely, securely, and economically take us there.

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