How lenders laced Covid-19 loans relief with hidden pain

Banks and regulators across the world offered varied reliefs to borrowers at the onset of the Covid-19 pandemic, but the lenders were generally given a free hand to determine specific conditions that were tied to the loan repayment breaks.

In the East African Community, Uganda and Tanzania joined Kenya in asking commercial banks to offer their customers loan repayment holidays.

Rwanda opted to inject more liquidity into its financial systems to cushion the lenders from the economic shock that came with loss of jobs and closure of businesses.

Similar to the dilemma facing Kenyan borrowers, the US media reported frustrations among customers who applied for loan relief, only to be required to make lumpsum payments after the repayment holidays.

The Reuters news agency on April 2 reported the struggle of a borrower who was granted a 90-day repayment holiday “without late fees” but would then be required to pay all amounts due after the three months or face penalties and a knock on her credit report.

Mortgage payment

“If you don’t have your mortgage payment on April 1, why in the world would you have $6,000 on June 23?” the borrower posed in the interview with Reuters.

In Europe and Asia, banks also offered Covid-19 repayment plans that had strings attached to them. “Policymakers in Europe and Central Asia have so far primarily introduced temporary moratoria, where decisions on which borrowers qualify are usually left to banks,” stated the World Bank in a policy note dated April 2020.

The Bank of Uganda (BoU) issued guidelines that allowed Supervised Financial Institutions (SFI) to restructure loans so that they could recover depositors’ funds and maintain the required liquidity levels.

The BoU directed lenders to offer loan repayment holidays for a maximum of 12 months, loan tenor extensions, and any other forms of debt restructuring to protect the interest of their borrowers. Similar to Kenya, the credit reliefs were only to be granted within the 12-month period with effect from April 01, 2020.

“Consumer protection remains paramount, and any credit relief(s) offered must be in the best interest of customers, and with full disclosure,” said BoU in a statement.

“The decision to offer a credit relief to a customer or decline a request for a credit relief from a customer is the responsibility of the Supervised Financial Institution (SFI).” BoU said the credit status of the borrower at the time of granting a repayment holiday would remain unchanged for the duration of the said repayment holiday.

The Ugandan banking regulator also suspended the settlement of arrears as a condition for restructuring credit facilities for 12 months with effect from 1 April 2020. Restructuring of loans arising from the impact of the Covid-19 pandemic would not be treated as an adverse change in the borrower’s credit risk profile, BoU stated.

Credit Reference Bureau

Like in Kenya listing of defaulters with the Credit Reference Bureau (CRB) on credit facilities subject to the moratorium was suspended.

In Rwanda, the National Bank of Rwanda (NBR) provided a Rwf50 billion (About Sh5.6 billion) loan facility for the banks and reduced the reserve requirement ratio for the lenders from five (5) per cent to four (4) per cent to support the country’s banking sector.

The Bank of Tanzania (BoT) announced monetary policy interventions aimed at protecting financial sector stability and to the cushion the economy from the Covid-19 Pandemic.

 As part of these measures, BoT lowered the statutory minimum reserve requirement to six percent from seven percent to provide lenders with additional liquidity and reduced the discount rate discount rate to five (5) per cent from seven (7) per cent to allow banks access cheaper loans through the Central bank’s lending window.

The regulator also agreed to lend to banks to with less collateral than before by reducing the haircuts on government securities to five (5) percent from 10 percent for treasury bills and from 40 percent to 20 percent for treasury bonds.

BoT also permitted commercial banks to negotiate with their customers the possibility of to restructure their loans and requested banks, in collaboration with the mobile network operators to increase their daily transaction limits.