Banks’ plans to demand more bad collateral from borrowers

It is now an open secret that some banks are looking for ways to cover their backs to save their loan books.

Some of the lenders found that they were lending money to clients whose collateral was either land or buildings that were depreciating in value.

Some of the affected lenders therefore consider formally contacting borrowers seeking additional collateral when the value of loan collateral depreciates. Experts agree that banks are considering this approach to cover a possible default during the loan period.

Banks are stepping up to tighten lending conditions as they currently hold more than $ 37.1 billion (4 trillion shillings) in securities tied up in real estate, which has recorded a decline in value.

The banking sector is currently shaken as major lenders fear massive losses should a bubble burst in the once lucrative real estate sector.

Therefore, major lenders need to be on their feet and frequently burn the Midnight Oil with frequent appraisal and reassessment of billed properties to avoid getting caught with their pants down. This vigilance would allow them to communicate upstream to borrowers whose collateral has depreciated in order to provide additional security. It can also force borrowers to watch if the value of their property has depreciated so as not to be caught off guard by the bank’s communication!

On the other hand, potential borrowers may feel the pinch as banks may soon lend money only on collateral (properties) that are worth much more than the loan sought.

Therefore, real estate investors should be listening to whether or not current trends in the local real estate market point to a bursting of the bubble.

There is a section of real estate investors who believe that the real estate bubble is not in sight, arguing that there is not a lot of borrowing. They further argue that it is not economically possible for the market to collapse without massive borrowing and default to start.

Separately, there are also optimists who believe that the local real estate market is driven by demand and not by speculation.

– Harold Ayodo is a lawyer at the High Court of Kenya.


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