IMF warnss against easing the criteria of classifying loans

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The International Monetary Fund (IMF) has cautioned against easing the standards for categorizing bank loan performance, pointing out that the criteria would compromise transparency, which usually ensures reliability and accuracy of the data collected from the financial sector.

Easing the standard of classifying would imply that the period over which a loan is due and unpaid would be extended.

The Central Bank of Kenya (CBK) and the Treasury listed changing the method of loan classification as a way to cushion the financial sector in their letter to the Bretton Woods institutions requesting the Sh78.4 billion loan facility.

“In the interest of transparency and ensuring that NPLs (nonperforming loans) potential losses are measured as accurately as possible, the staff advises against modifying loan classification rules and welcomes the authorities’ plan to sunset these by March 2021,” said IMF.

The Treasury and CBK had taken measures such as increased flexibility and reduction in the base rate as ways to deal with the crisis.

“The Central Bank of Kenya (CBK) has taken several measures to help support the economy and maintain financial stability since the start of the crisis. These include 100 bps cuts in the policy rate and cash reserve ratio, an increase in reserve repo tenors, and increased flexibility for banks’ loan classification and provisioning requirements. These measures should help maintain the availability of liquidity and prevent abrupt financial dislocations,” the two firms said.

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Anthony Kiratu is the Founder of Finsolutions. He is a financial analyst with over 5 years experience in research, investment advisory, valuation and financial modelling. Anthony is a member of the Institute of Certified Investment and Financial Analysts and Institute of Certified Public Accountants of Kenya. He is passionate about development of African Capital Markets through training of investors and dissemination of information for sound financial and investment decision making process. He is also a part-time lecturer in the Certified Investment and Financial Analyst course in the subjects of International Finance, Portfolio Management, Equity Investment Analysis, and Fixed Income Securities. Email: anthony@finsolutions.co.ke Contact: +254 780216631

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