Chapter 5: Recovery of default account

5.1 Classification of credit facility account

Classifying credit facility accounts means sorting each loan, overdraft or other credit account into a category according to how well the borrower is repaying it. The category shows the bank how safe the account is, how much it must set aside as a provision against loss and how closely the account must be watched. Classification is done by the credit and recovery staff on a regular basis, using the days a payment is overdue and the borrower's ability to repay. Example: a loan officer who sees that a trader's loan instalment is 45 days overdue moves the account from the normal class to the watch class and starts closer follow-up.

Performing and non-performing accounts

An account is performing when the borrower pays principal and interest on time, or only a short time late, and the bank expects to be repaid in full. It is non-performing when payments are seriously overdue or when the bank doubts that the borrower will repay. The split matters because non-performing accounts reduce the bank's income and require provisions.

• Performing accounts: repayments are up to date or slightly late, and the borrower's business or income remains sound.
• Non-performing accounts: repayments are well overdue, or the borrower's ability to pay has weakened, so loss is likely or possible.
• Treatment: performing accounts are monitored routinely, while non-performing accounts go to a recovery or workout team.

Classes of credit facility accounts

The Central Bank of Kenya's prudential guidelines place credit facilities in five classes, according to the time that payments have been overdue and the likelihood of repayment. The usual day bands are shown below, and the bank applies the limits that the current guidelines set.

• Normal: the account is current and no special action is needed beyond regular review.
• Watch: the account is slipping, so the officer contacts the borrower and examines the cause.
• Substandard: the account is classed as non-performing, interest may stop being recognised as income, and a provision is made.
• Doubtful: the bank expects to recover only part of the debt, so a larger provision is made and security is valued.
• Loss: the account is regarded as uncollectable, and it is written off when the approved procedure is complete, although recovery efforts may continue.

Other ways of classifying credit accounts

Banks also group credit accounts for management purposes, besides performance.

• By type of facility: term loans, overdrafts, mortgages, asset finance and credit cards each have their own repayment pattern and risk.
• By security: secured accounts are backed by collateral such as land or a vehicle, and unsecured accounts rely on the borrower's promise to pay.
• By borrower: personal, small business and corporate accounts are followed by different teams.
• By channel: digital loans taken through mobile or online banking are tracked by their automated repayment schedules and alerts.

Review and reclassification

Accounts are reviewed regularly, and an account moves between classes as payments are made or missed. A borrower who clears the arrears and pays regularly may be moved back to a better class, while one who misses payments moves down.