Borrowers are calling for the review of the Public Auction Law, saying the two-month period set as the threshold for the bank to start auctioning property is too short and puts them at a disadvantage.
The law says that the bank can auction property given as collateral when a client defaults on a loan after two months.
“Two months is too short and it’s actually technically one month and you are in the red zone. The law needs to be revised to extend that period,” said Francois Maguge, a bank customer whose property recently faced public auction.
He added that its even worse when dealing with saccos and microfinance institutions because of their unfair interest rate system.
“Working with saccos is even worse. You apply for a loan of Rwf1.5 million and they only give you a loan of Rwf1.2 million, but they calculate your interest rate based on the Rwf1.5 million. They do this and then the moment you default on payments they put your property up for auction,” said Mr Maguge.
Banks have been facing the challenge of non-performing loans for the past few years, which has driven many lenders to auction property belonging to customers who have defaulted.
However, the NPL rate has eased slightly in the first half of this year to 6.9 per cent in June down from 8.2 per cent recorded in June 2017 for banks and 8 per cent from 12.3 per cent in the same period for microfinance institutions.
Many banks are still auctioning off property in large numbers and players are saying if the law remains unchanged the trend is likely to continue.
Too short time
Kanzayire Solange, a private court bailiff and receiver who has been conducting auctions for the past 10 years, also faulted the auction law saying it needs to be reviewed and the time it takes to be in the auction zone extended.
“The time given by the law is too short and unfair to those who take loans. I have done this job for the past 10 years and properties are auctioned off too soon,” she said.
Ms Kanzayire added that many defaulters are ignorant about the law, so they get lax and are put in the red zone.
The other issue she pointed out that is affecting borrowers is the high interest rate, which is a strain especially for those who are in businesses that are slow to pick up and do not give instant returns.
Farmers recently appealed to the government to help them negotiate for an extension on their loan repayment schedules with financial institutions as they deal with the aftermath of the torrential rain, which destroyed thousands of acres of farmland in many parts of the country.
For instance, the rice farmers’ co-operatives federation estimates that about 3,000 out of 10,000 hectares of rice planted this season have so far been lost to flooding.
In 2017, local banks issued loans valued at Rwf1,579 billion up from Rwf1,403 billion in 2016.
After a borrower misses one month of a loan repayment, the bank writes to Rwanda Development Board informing them about the issue and their intention to auction the borrower’s collateral in the second month, after which RDB gives them the go-ahead.
The CEO of Atlas Mara and president of Rwanda Bankers Association Maurice Toroitich said it would serve the banks better if the lenders could auction property directly without waiting for clearance from RDB.
“My experience in other markets is that when a bank gives a mortgage, the law gives it statutory power to appoint a licenced auctioneer who invites public bids. But here when a customer defaults you have to give them notice and then apply to RDB to auction the property. Sometimes RDB doesn’t permit banks.”