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3 Ways You Can Reduce Bad Loans

May 31, 2018

 

Kenya’s banking industry has experienced adverse changes in terms of their financial assets since 2015 till now. This has had an effect on the loans being issued from the banking industry which has eventually caused an increase in non-performing loans. The Central Bank of Kenya in 2017 defined non-performing loans as failing to repay in accordance with terms of agreement.

 

From a global perspective, non-performing loans have risen over the years and this has caused banks to experience a drag in their performance through:

·         Reducing net interest income

·         Increasing impairment costs

·         Additional capital requirement for the high risk assets

·         Additional servicing costs and management time

·         Reduced new lending of loans

 

The three main ways in which non-performing loans can be reduced is:

1.      Formation of Policies, Procedures and Underlying Criteria

The Non-performing loans flow can be controlled if the lending underwriting and risk appetite is amended. Therefore, banks should set limits around risky lending including the loan-to-value ratios, geographic and sector limits. Furthermore, the underwriting criteria has to be in line with the economic status of the market.

 

2.      Early Warning System

Non-performing loans can also be reduced if a robust warning system is applied to identify the credit score of the individual as well as the risk segments so that immediate remediation and attention can be applied. This will help banks reduce chances of turning a loan into a non-performing loan.

 

3.      Incorporate a Legal Framework

A proper legal framework should be implemented for the corporate restructuring as well as timely disposal of the NPLs. For instance, in Serbia (2012) the SMEs signed an agreement that supported a restructure of their debt with banking creditors through providing out-of-court mediation.

 

Banks, therefore, have to re-assess how they can deal with the issue. For instance, NIC bank has been able to avoid and limit NPLs through acquiring the services of NLS Banking Solutions’ Debt Collection Management System. NLS Banking Solutions is the most trusted and efficient company when it comes to instilling the Debt Collection Management System among other services that financial institutions can use to improve their operations. Not only does NLS Banking Solutions deal with the bank’s debt problems, but, it also provides additional services such as Digital Payments (mobile banking, B2B Gateway, internet banking, e-billing payment system, agency banking), Biller Engine, Loan origination solutions, Reconciliation Solution (INTELLICHHECK) and many more.

 

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