Bad debts restructuring techniques and non-performing loans of commercial banks in Kenya

Abstract

The 1990s passed as a decade in which commercial banks in Kenya experienced highs and lows in terms of profitability and asset quality. While other sectors suffered major losses due to the economic recession, the banks cashed in on high interest rates arising from wrong monetary policies pursued by the government immediately before and after the 1992 general elections. It was however evident that the supernormal profits could not be sustained in the long run. By mid-1990s, the banks were already experiencing problems with growing levels of non-performing loans as customers become either unwilling or unable to service the high interest rates and charges. Profitability started declining due to dwindling good lending opportunities, lower interest incomes and high provisioning for bad and doubtful debts. The banks were forced to institute strategies to deal with the non-performing loans if only to survive in the long run. Most of them have established in-house divisions or departments to restructure the bad loans. The government has also recognized that economic turnaround can only be achieved if the banks are relieved from the bad debts burden. Plans are therefore underway to set up a central agency to take over the bad debts from the banks. The study aimed at finding out the techniques used by the commercial banks in Kenya to entice defaulting borrowers to resume servicing their obligations. It also aimed at identifying their importance and preference and whether there is a relationship between the restructuring techniques and the level of non-performing loans. The general conclusion drawn is that banks use a combination of techniques ranging from lowering interest rates and charges to providing addition loan facilities to distressed borrowers (in special and rare circumstances). The study also found that banks are placing increasing emphasis on restructuring of bad debts and that there is no significant difference between the techniques used by the various categories of banks