Why your employer’s financial status can deny you a bank loan

Barclays Bank Thika Branch Manager, Nicholas Njenga (Left) engages with a customer during the ‘Wezesha Biashara na Barclays’ initiative in Thika town.(Photo: File/Standard)

Do you have an excellent credit score but work for an employer likely to sack you anytime? Well, this may soon start impacting negatively on your chances of getting a bank loan.

With cases of customers defaulting on loan repayment rising and the Government having denied banks ability to fully price borrowers’ risk when calculating interest rate, banks are now beginning to get cautious on lending to clients whose chances of being rendered jobless are high.

According to Barclays Bank Managing Director Jeremy Awori, banks will require a robust credit review process extending to employers of the customers they serve.

“Banks will now have to do better at credit scoring. It is not just about assessing the customer’s individual risk. When lending, I will have to also ensure your employer is strong enough to pay you,” he says.

The added scrutiny is to help control non–performing loans (NPLs), which are posing an increasing burden to lenders.

NPLs refer to money advanced to a debtor who has not made any scheduled payments for at least three months. Therefore, the loan is either in default or close to being in default.

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Private households form the majority of banks’ loan book and, therefore, deep job cuts in the economy as companies struggle to stay afloat enhances chances of borrowers defaulting to meet basic needs.

Struggling businesses

Latest economic indicators from Central Bank of Kenya (CBK) show that gross non-performing loans hit Sh226.6 billion in March, up by 32.8 per cent from Sh170.6 billion in a similar month last year.

Data for three months to March shows that of Sh29.3 billion loaned out, Sh15.8 billion, or 54 per cent of the loans, was non-performing at the time CBK finished compiling the data.

Mr Awori, whose bank grew its loan book at the fastest pace among its peers (16 per cent) in 2016, now says that banks will be forced to be very prudent not to lend in riskier areas in the face of struggling businesses.

“The reality is that there are different economic cycles. You only need to open newspapers and see how many companies are challenged. That becomes another additional risk that we have to manage,” he told Weekend Business.

Newspapers tell a story of job cuts and non-committal employers in nearly all sectors. In the recent past, financial, retail, manufacturing and agriculture sectors have all announced job cuts, with the latest wave hitting top-tier banks.

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Ironically, in 2014, Barclays introduced a salary retrenchment cover where customers can pay some premiums every month with promise that if they lose their jobs, the bank will pay them their three-month basic salary.

To prove how heightened the risk of losing employment has become, other lenders such as Standard Chartered rolled out similar cover.

Commercial banks are also increasingly demanding that salaried borrowers seeking secured and unsecured loans have insurance against retrenchment. This ensures that when one is retrenched, the insurer takes up the loan.

Traditionally, banks have been lending to individuals based on their personal credit history but Mr Awori believes that the risk of redundancy has increased, posing additional risk to even a good customer. “We have to look at employers and see if they are reliable or not, especially if you are lending to hundreds or thousands of employees from a single company,” he says.

He adds that banks may have to look at the employer’s processes and controls to minimise the risk that some employers may actually deduct loan repayments but fail to forward to the banks.

“I sympathise with people who have a perfect repayment history but then they are not paid their salaries. You will find them willing to pay but it is not possible when their employer takes months to pay them,” said Mr Awori.

In the recent protest by Uchumi Supermarket, employees who had gone for two months without pay showed Weekend Business messages from banks warning them that they risk being listed as poor borrowers.

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