Banks can leverage technology to maintain a healthy credit portfolio

The key to a bank’s success is the quality of its loans. Still Covid-19 pandemic tore up institutional loan portfolios, driving up the proportion of loans with repayments on hold and leaving banks earning far less on their existing loans than they had expected.

Kenyan banks weathered this downturn with remarkable resilience. At the end of 2020, some 15% of loans held by Kenyan banks were classified as “non-performing”, meaning they had gone three months or more without repayment or service. But that share, up from 12% at the end of 2019, could have been the start of a much bigger deterioration.

Instead, our banks restructured and rescheduled more than a third of the loans on their books worth UGX 1.1 trillion, allowing payment holidays, extending the period during which loans could be repaid to reduce monthly repayments and removing interest payments or fees. These measures have enabled most of those who have suffered severe setbacks as a result of the pandemic to regain their footing and resume servicing their loans.

Banks were also supported during the first year of the pandemic by relaxed regulations from the Central Bank of Kenya, which meant they did not need to maintain the same levels of cash or funds held. However, in March this year, with most loan portfolios stabilized, these emergency measures were lifted, meaning banks must now achieve the same levels of capital adequacy as before the pandemic.

Yet client activity is now subdued, loan growth is only 7% per year, and the cost of bad loans has increased. It’s a cocktail that has put banking profitability under pressure. Indeed, in Tier 1 banks nationwide, average year-end profits fell from UGX 12.2 billion in 2019 to UGX 9.1 billion in 2020, down 25.7% . Additionally, analysts report that most banks have committed to further debt relief in 2021 to prevent more loans from becoming delinquent.


But, even as the sector manages such a degree of change and turmoil, its own health remains critical to the overall health of the country.

As the International Monetary Fund observed in June this year when reviewing the banking sector in sub-Saharan Africa: “Banks have a critical role to play not only during the crisis in providing temporary relief to businesses and households , but also during the recovery by supporting economic activity. and facilitate the structural transformations initiated by the pandemic.

This role, as well as maintaining banks’ own growth and profitability, requires solutions for origination and loan management that are more robust than before, and which guarantee an overall improvement in the health of the portfolio: it is where banking technology is breaking new ground.

In retail lending, loan decision-making processes in Kenya have changed dramatically in recent years as banks have updated their technology to use alternative data sources, as seen in the market. mobile banking loans and with the country’s three credit reference bureaus.

Yet for SMEs and enterprises, credit decisions remain a protracted process as information is manually collected and assessed over weeks, sometimes, to establish borrower creditworthiness.

The need to move away from these tedious processes has recently driven major banks to adopt technology, such as our CreditQuest, to automate credit granting and manage workflow, reviews, documents, customer reviews and credit decisions. This kind of Technology brings together all current and historical credit data in a unified platform, giving bank analysts a true single customer view of credits and collateral.

For corporate lending, it also enables banks to automate financial statement analysis and calculate key ratios, projections and peer group comparisons, with features that track performance and quickly notify banks of potential problems. For example, they can compare a loan application from the hospitality or ICT sector with its peers and see how its relative performance compares to the track record of its peers.

This level of information allows banks to assess the risk rather than offering the traditional single loan interest rate; low-risk borrowers earning lower interest rates than high-risk borrowers.

Banks using such technology have reported reductions in their credit processing times of 80% and achieved a 50% reduction in costs. For banks that incur higher loan impairment costs elsewhere, these reduced processing costs are a valuable contribution to profitability.

This detailed data also enables banks to manage their overall credit portfolio in more sophisticated ways, with a new level of understanding of concentration and exposure as well as the ability to slice and dice data, opening up new possibilities for the banking sector to attract new credible borrowers. .

Increased lending is what shareholders need from banks to restore their returns, and what the economy needs to rebuild our post-Covid economies. For while trends suggest that many banks may have retreated to increased holdings of government securities in order to reduce risk and capture returns, these securities generally command narrower margins than lending to the private sector.

More importantly, government recurrent or capital spending cannot ensure GDP growth and recovery where the private sector is starved of debt financing.

So our path to recovery must embrace private sector financing, with improved lending through automation that gets us there, safely, securely and profitably.

Editor’s note: This article was written by Tunde Oladele, CEO of SG NewTech.