The Central Bank of Kenya (CBK) will intensify physical inspections of banks to expose lenders in breach of the new loan pricing model, setting the stage for daily fines to lenders that fail to lower credit in response to policy changes.
The banking regulator reckons that the new model, which is based on a single rate determined by average interbank rates, will make it easier to clamp down on banks that fail to transmit policy changes in the pricing of their loans.
Bankers face a fine of Sh20 million or three times the monetary gain, with the regulator leaning on the punitive penalty.
Lenders risk an additional daily penalty of up to Sh100,000 for every case or implying for each loan account, with the executives liable for a Sh1 million fine.
The bankers and CBK agreed that the current model, where each bank has its base rate, has failed to take the cue from monetary policy actions like cuts on the benchmark rate or the Central Bank Rate (CBR).
This failed to deliver cheaper credit to Kenyan borrowers fast enough, despite signals from the apex bank when it cuts the benchmark rate.
CBK Governor, Dr Kamau Thugge, says the on-site inspection and surveillance over lethargy in banks’ reduction of interest rates will change significantly under the new model for pricing loans, which starts from December 1 on new loans.
“I think it will change very significantly. We did on-site inspection of all the banks and those inspections were really to see how and whether the banks were following their credit pricing models,” Dr Thugge said in an interview with the Business Daily.
“The results were not very encouraging, and this is also part of the reason why we are overhauling the whole Risk-Based Pricing system. In fact, some banks were not even following the models we had agreed on with them, and of course, now we are in the process of assessing whether there will be penalties and how much those penalties will be.”
Under the new model, the total lending rate will be the interbank rate plus a premium or K, which is believed to align with the policy rate.
The interbank market rate refers to the rate at which commercial banks borrow and lend money among themselves on a short-term basis and is widely relied upon as the gauge of how liquid the market is.
The premium K will be a factor of a bank’s operating costs related to its lending business, the expected return to shareholders, and the borrower’s risk premium.
The interbank rate, however, has limits in terms of volatility because it operates within limits fixed on the CBK benchmark rate to ensure the benefits of monetary policy are transmitted to the real economy.
The limit current stands at plus or minus 75 basis points of CBR.
This means that the interbank rate cannot rise above 0.75 percentage points of the CBR of 9.5 percent or a maximum of 10.25 percent, and not less than 8.75 percent.
CBK has renamed the interbank to Overnight Interbank Rate to Kenya Shilling Overnight Interbank Average (KESONIA).
“Currently, we do not have a common reference rate, but now with KESONIA it will be very easy to take the banks to task because all the banks are going to have the same reference point,” Dr Thugge.
“There will be surveillance from the Central Bank to make sure that banks are implementing the new model. The idea is that within 15 days after the board approval of their models, banks will send those details to the Central Bank and that will be the basis for subsequent engagement to see whether they are following up on what they have submitted to their boards.”
The bank’s model forms the K in the new loan pricing formula.
Only foreign currency-denominated loans and fixed-rate loans will be exempted from the new risk-based pricing model.
CBK will be expected to publish the KESONIA rate each day at 9:00am for rates applicable for the previous day.
