When banks become vulnerable to con men

In a stunningly daring and perhaps criminal move, one man successfully obtained half a billion francs from two banks using a single low-value property as collateral; he has since ‘disappeared’ leaving the lenders counting their losses. Risk analysts like Aimable Nkuranga of Credit Reference Bureau (CRB) say it’s possible for a client to borrow money from two banks using a single property as collateral as long as its market value is large enough to cover both facilities in case of a default. However, that wasn’t the case when, in May 2014, the man in question obtained two sizeable loan facilities, worth over Rwf500 million, from two different banks, apparently, with intentions to defraud. “Certainly, on the face of it, someone inside the two banks was compromised enough to turn a blind eye to the proper due-diligence process,” Nkuranga said. One of the two lenders involved is a large commercial bank that gave the ‘tycoon’ Rwf400million. The other victim is a well established international Micro-finance institution that advanced him a Rwf75 million loan facility. Although Rwf400 million is arguably a relatively small amount in a portfolio of a large cross-listed bank, it could be a tip of the iceberg of how banks are exposing themselves to risky assets worth billions due to carelessness and poor due-diligence processes. The increased volumes of bad loans given to people seen as ‘big clients,’ analysts say, has contributed to the elevated risk of lending, a chorus recited by commercial banks in justification of high lending rates. In essence, by charging high interest rates on borrowers, banks are attempting, partly, to recover assets lost in bad loans by extending the burden of loss to new borrowers. At the end of 2014, the Non Performing Loan (NPL) status in the banking sector was 6.0 per cent, which is 1.0 per cent above the central bank’s safety radar of 5.0 percent. The situation was worse in the Micro-Finance Institutions (MFIs) having increased to 7.6 per cent from 6.8 per cent at the end of December 2013, according to the BNR’s monetary policy and financial stability report for the third quarter of 2014. By all accounts, the case of the con man is an embarrassing incident for the banks to admit to, as it would get the central bank to cast doubt over their internal regulatory measures aimed at guarding them from glaring risks that could have a negative impact on the financial sector stability. The New Times spoke to top managers of both institutions who provided the main facts surrounding the incident; however, both sources requested for anonymity and declined to reveal the identity of the client, citing client-confidentiality-clauses. The genesis story goes that in May 2014, the commercial bank approved a loan of Rwf400 million to a supposed city businessman who claimed he dealt in construction materials and that he owned a number of hardware shops around town. At around the same time, the micro-finance had also reportedly approved another facility of Rwf75 million making a total of Rwf475 million from both banks without interest. “However, by October 2014, the commercial bank got concerened after the client wasn’t servicing the loan as agreed and his whereabouts were not known,” the source intimated. Meanwhile, the other victim, the micro-finance institution, was also looking for the same client; it had approved a loan of Rwf75 million to the client, a large amount in micro-finance banking. The same micro-finance had another bad client who had reportedly disappeared after obtaining a loan of over Rwf40 million setting the micro-lender aback by over Rwf100 million. It has since emerged that the man didn’t own any businesses as earlier claimed. Apparently, he connived with ‘friends’ who actually owned shops and posed as the owner to convince the credit officers that he indeed had active businesses. As collateral, he listed a residential house in Nyarutarama, an uptown city suburb whose value was, apparently, with help, inflated to obtain the loan. By close of last year, in their separate assessments, it had become clear to the banks that they had been fleeced by the client as all his known contacts weren’t available. Even the businesses he had claimed as his own were now occupied by their owners who frowned at creditors when they showed up to check on the client. With nothing to attach, both lenders made a mad rush for the residential property in Nyarutarama but the micro-finance lost out to the commercial bank which had already taken possession of the house. Inside sources tell The New Times that the micro-finance attempted to negotiate with the commercial bank to have the property jointly liquidated and have the returns shared between the two firms. “But we realised the property’s market value wasn’t big enough to cover both loans,” said the insider. The commercial bank has since rented out the property in a bid to repay the loan. It’s not clear whether the banks are involving the Police to try and apprehend him, but what appears certain is that the micro-finance is losing out. Inside help The commercial bank, according to the insider, had initially rejected the client’s loan application, but, in a dramatic turn of events, the suspicious application was accepted and the bank signed off Rwf400 million to be repaid over a ten-year period. Morris Toroitich, Managing Director of Kenya Commercial Bank (KCB) in Rwanda, speaking generally, said there’s a tendency for banks to ease their procedures whenever they’re dealing with clients regarded to be ‘big’ and well established. “Every bank likes big clients and, in such cases, it’s possible for such applications to falsely excite credit officers and once that excitement isn’t controlled, it can spread to everyone in the process, softening an otherwise strict credit processing procedure,” he opined. Toroitich admitted that banks need to always keep their guards up since it’s also possible to compromise the bank staff so as to by-pass the proper-due-diligence procedures. Françoise Kagoyire, BNR’s director of bank supervision, said in a statement that although a borrower can use the same collateral in different banks, its qualification must depend on professional valuation of the property and proper assessment by the granting bank. “Perhaps the bank had management weaknesses in ensuring proper due-diligence of the customer and property offered or it was a fraudulent vice by the bank officials,” she said. Kagoyire added that where such weaknesses are found, the concerned bank is penalised or, in extreme cases, its board is warned or may also be sanctioned. “The fact that the concerned client used the same collateral to obtain the loans shows serious weaknesses during the collateral registration process since they had to consider the UPI number which apparently was not the case,” she said. In 2014, banks received loan application worth Rwf790.40 billion, of which loans worth Rwf652.9 billion were approved, representing a rejection rate of 17.4 per cent with the leading reason for rejection being lack of capacity to repay or high-risky borrowers.

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When banks become vulnerable to con men