Nowhere to hide for state loan defaulters as KDC fidgets
After more than seven years of reforms, the Treasury last year merged three public development finance institutions (DFIs) – Industrial and Commercial Development Corporation (ICDC), Tourism Finance Corporation (TFC) and Industrial Development Bank Capital Ltd – to form Kenya Development Society.
KDC acting chief executive Christopher Huka told the Business Daily why the new entity has prioritized collecting bad debts, some of which date back to the 1960s.
WHY WAS THE MERGER OF THESE THREE DFIS IMPORTANT?
The main objective of the merger was to create a single strong DFI that supports Kenya’s socio-economic growth. Our focus now is to catalyze Kenya’s socio-economic growth by creating alignments with national development priorities.
Most of the DFIs that were there before had lost that national development alignment like the Big Four Agenda, Vision 2030 and the SDGs (the UN Sustainable Development Goals).
The merger also gives us the possibility of co-financing with other banks, which was not exploited so much before. We also want to be the key agency that will carry out government projects with regard to the retrocession, because we have the capacity to do so.
WHAT ARE SOME OF THE NEW STRUCTURES YOU HAVE CREATED TO ACHIEVE YOUR GOALS?
We have a new department called Resource Mobilization and Partnerships. Our ambition with this new direction is to open up all the opportunities that have not been exploited before.
For example, partnering with the Treasury’s PPP (Public-Private Partnership) Department to participate in PPP projects. Our mandate gives us that, unlike previous DFIs.
WHAT NEW OPPORTUNITIES DO YOU ENVISAGE?
There are areas that we have not exploited. We are thinking, for example, of clean renewable energies which have not been fully exploited and, therefore, we have objectives set in this direction in this sector.
The other area is post-harvest management which excites me because we all see how much of our agricultural produce is going to be wasted during a bumper harvest. The other opportunity is in the area of the blue economy where we have a body of water that has not been fully exploited.
We also look at the livestock value chain where we take an end-to-end look at the entrepreneurs within that chain. We seek to strengthen trade links, from improved production, veterinary services, hay production to animal products, including leather. These were not in the strategies of these DFIs before.
AND HAVE YOU SET AN AMBITIOUS LOAN BOOK GROWTH OBJECTIVE IN YOUR THREE-YEAR STRATEGIC PLAN UNTIL 2024?
In our strategic plan, we want to grow our loan portfolio from 4.5 billion shillings to around 29 billion shillings. We wanted to be ambitious. We didn’t want a conservative goal. And so based on our assets, we said we would have to sweat those assets to project that kind of growth.
Certainly, there will be challenges along the way. One is balance sheet repair. It takes a little time due to the processes we need.
OVER THE YEARS, DFIS DEFEATED HAVE STRUGGLED TO RECOVER THE LOANS. HOW DO YOU TAKE UP THIS CHALLENGE?
The bad book for the three organizations is around 31 billion shillings. However, the principal is 4.1 billion shillings. Over the years, penalties and interest have accumulated. Since independence, when, for example, the ICDC was created, it has been lending and provisioning bad debts.
But he never canceled a single loan because of the process involved. What happens is that he continues to accrue penalties and interest.
WHY DID PENALTIES AND INTEREST ACCUMULATE AT THESE LEVELS?
There is a rule called the principle of “in duplum” [where lenders should cease charging interest on defaulted loan once it surpasses the principal amount]which does not apply.
There are cases where the loan has tripled over the years or even 10 times more. Most of these loans, as you see in the books, say 100 million shillings, was a 50,000 shillings loan in the 1960s.
So it wasn’t right to leave it like that. If the penalties and interest reach the principal amount, ideally you are supposed to stop (more fees) but it has not been done.
It’s part of the cleaning up (the balance sheet) that we do. This [the clean-up] is our priority because we want to attract investors and the first thing they look at is your books.
HOW DO YOU PLAN TO REMOVE BAD LOANS FROM YOUR BALANCE SHEET?
We have to get write-offs through the board and treasury approval process. We have grouped the batches of these non-performing loans. For example, we have those from the 1960s, 1970s, 1980s and 1990s, and those taken afterwards. The next step is to research the titles of each of these loans.
We want to see if the collateral provided can be monetized as there are instances where it cannot be monetized like ancestral land which you cannot even sell as it has been subdivided over the years.
We do this cleanup by removing these amounts from our balance sheet and placing them under SPV [special purpose vehicle] which will only focus on the collections of this money.
WHAT WILL HAPPEN TO THE BAD CREDITS YOU CANCEL?
When we write bad debts off our balance sheet, it doesn’t mean we forget about them. We are looking for innovative ways to do this. We are studying the possibilities of obtaining organizations that do debt collection.
We’ve already spoken to three companies that are good at debt collection. Second, there are organizations that buy bad books and deal with them. Third, if it’s a business, we put in place a team of experts within KDC who will put in place a turnaround strategy for those who can be recovered.
I think so [debt recovery] can be done. It’s just that we’ve never given it any serious consideration to say it’s a bad book of this size that needs to be dealt with.
WHY DO YOU MAKE PRIORITY TO COLLECTING DEBTS FROM FACILITIES PREVIOUS MORE THAN HALF A CENTURY?
This is our priority because we want to attract investors and the first thing they look at is your books. The best thing to do is therefore to clean up your books in order to attract investors who wish to work with you, either through project financing or an equity arrangement. This is an essential growth strategy for us.
HAVE YOU STARTED SENDING WARNING LETTERS TO DEFAULTERS?
Last December, the firm sent more than 100 letters of formal notice to clients who had not come to our offices for four or five years for non-payment. We asked, “Are there any guarantees?” The answer was “yes”. So I said, “keep six or seven auctioneers ready.” Paid or not paid, people started coming to the table.
When they came, we asked them to make reimbursement proposals based on their books. We found out that they service other facilities at other institutions, but not KDC. Why? [Because there is] no pressure. They only deal where there is pressure.
We managed to get an average of three contractors daily coming before the notice deadline to offer their repayment plan ranging from Sh260,000 to Sh3.5 million per month. This is how we made our non-performing book fall in three months from 78% to 71%.
WHAT ARE YOU CHANGING IN LOAN?
We are changing the mindset of borrowers and lenders, who are our own staff. We want to keep in mind that this is as much a commercial entity as it is a government entity. He must earn money for himself by meeting the needs of the entrepreneur where banks and other financial institutions do not meet.
yes we plug the [credit] gap, but we have to be careful about how we manage our borrowing and lending. We have revised our assessment criteria. We now follow the five Cs: character, capacity, guarantee, capital and conditions.
Most of our projects that failed, failed because of [lack of] character and independence. As long as you mix borrowing with a little lack of independence from influence which kills your objectivity because someone tells you to lend there and you don’t follow procedure established, you will certainly fail.