A few days ago, I saw an advert in one of our national dailies in which a financial institution occupied two full pages with pictures of many houses it was selling. Banks are not real estate companies, so why the caption ‘Properties for sale?’ The pictures convey a meaning. These are houses customers of the bank used as collaterals for loans and had forfeited due to failure to honour their side of the bargain. The bank is disposing of those property to recover its debts from them.
I began to ask myself many questions – not based on pessimism, but experience and the reality of property markets in Ghana. Though collaterals take many forms, the emphasis of this brief will be on the houses as my reference point.
How many people can afford those houses at the prices at which they are being advertised?
Would the prospective buyers (if any) have ready-cash to pay for those houses?
If they don’t have ready-cash, would they approach their banks for loans to buy those houses and use the proposed houses as collateral?
If the financial institution is not able to sell those houses within a short period, what would be the implications on its liquidity (or capital?)
Aside from these questions, do you know that there are very shrewd borrowers who have property they want to sell – and as they don’t get ready buyers for them, rush to banks using them as collaterals to take loans with the intention of not paying back? You would describe this behaviour as a moral hazard. Shakespeare put it clearly and better: “There’s no art to find the mind’s construction in the face”.
But can you blame such borrowers? Collateral freak of a lender would give loans to these borrowers on the strength of their collaterals at the expense of their propositions’ viability. Anyway, you would find your solace in the collateral; after all, it is better than unsecured lending in its strictest sense. However, disposing of these collaterals to bring more money into the vault to stimulate the lending process is sometimes not as easy as accepting them in the first place.
As for the adverts on the property being sold, you would agree with me that the situation is not peculiar to only this lender but is a general phenomenon in the banking sector. In fact, as has always been the practice in credit management, bankers need a fallback by way of collateral to secure loan facilities to customers. Among other considerations, the amount of a loan is determined by the worth of any piece of property that a bank accepts as a collateral.
As a result, any property a borrower submits to a bank as collateral for a loan is considered in terms of its value, location, and marketability. Generally, property in commercial cities and towns (i.e. Accra and Kumasi) is preferable to others in other parts of the country. This is because the ability of that property to appreciate and their marketability in these places are considered higher than other parts of the country. Interestingly, some financial institutions have in their credit policies appropriate percentages of total values for property which are acceptable to secure loan amounts.
Memoire of events
The usual diary of events after disbursement of a loan includes regular monitoring for regular repayments (depending on the terms) of the principal and interest. Even so, other events could have a direct impact on the customers’ ability to repay. For instance, the recent Atomic Junction Gas Explosion is an occurrence that could derail the Liquefied Petroleum Gas Station’s owner’s ability to repay any loan the company might have taken from a bank, even if it has insurance cover in place.
Apart from those exceptional cases which could disrupt business operations or affect sources of income for a borrower, banks and other lenders usually issue demand-notices to customers when their loans are in default. After many persistent efforts to recover the loans, one of the alternative options is to go to court in civil litigation to recover the debt. It is important to note in these circumstances that the rights of borrowers under the Lenders and Borrowers Act, 2008 (773 being amended), especially about pre-loan agreement disclosure, cannot be toyed with in court proceedings.
As bankers, we sometimes get it wrong! My colleague bankers and readers, have you ever read the statement of claims and the defences banks (lenders) and borrowers publish respectively through their counsel in the dailies? Any effort you make to read them regularly would broaden your horizon to appreciate the nitty-gritty of the loan business. To my mind, credit culture is not cast in stone, and it would be a hollow boast for anyone to claim authority in the field. It is in this light I humbly suggest to you that prudence is the protective cover in credit management!
That is just by the way. After many days of court proceedings followed by judgement – and in some cases the judgement is given in default if the customer was, in fact, served but has not entered an appearance (in court) – other processes should be followed by the bank to realise the collateral used to secure the loan. It is worthy to note at this point that the purpose of all these processes comes down to one thing – to recover the full amount given to the customer(s) with interest and other charges.
Realisation of Collaterals
It is revealing to note that our legal system permits under applicable laws realisation of collaterals without an order from the court. Notwithstanding, notice of this intention must be registered at the collateral registry after receiving notice of the borrower(s)’ default. In this respect, the property must be disposed of through an auction sale. The fact of the matter is that immediate judicial sale of a property upon application to the court is more beneficial to the bank, especially when there is a ready market but its sluggish.
It is at this juncture that I would like us to have a more thought-provoking dialogue – around the property market moving at a slower pace at a time proceeds from expected sale of the collaterals are needed to shore-up liquidity for extended money creation (through lending). So, the question that anchors my exposition is: if we cannot realise our collaterals easily through auction sales due to income constraints of most prospective buyers, why can’t we explore the option of receivership alongside the judicial sale? Do we have to continue on the same trajectory?
By explanation, a receivership takes control of the houses used as collaterals out of the hands of the borrowers when the bank (lender) makes an application to the court. The court then gives direction that the property is put under the management of a neutral third party – the “receiver (either corporate or individual property manager)”. The receiver takes direction only from the court but is accountable to both the bank (lender) and the borrower.
The receiver is therefore requested to exercise its best efforts on behalf of the bank (lender) and the borrower. In view of that, the receiver establishes itself as manager of the property and has responsibility for security, maintenance and collecting rents. The income received from the managing the property is used to pay the bank’s judgement debts (principal, interest, and cost). The receiver is entitled to retain a portion of the income it has received for its remuneration and other related expenses on the property.
Reasons in support of Receivership
Do you know that there are corporate entities who prefer short-term leases(rents) to outright purchases? Some of those houses, if they are put under receivership, could meet their tastes and preferences. Indeed, there are individuals or employees including expatriates whose employers pay for their accommodation facilities at exorbitant prices.
Some of these payments come from loans they take from us while we have this property (collaterals) under lock and key with no ready buyers. Don’t you think under receivership, we can earn income readily from these sources? For instance, if under forced value you could still not get a ready buyer for a collateral at a location close to a public administration that has no residence for its director, don’t you think under receivership you can arrange with the directorate to earn income that could pay off the debt?
I agree that receivership has its own “hedges”, but we can trim its rough edges to maximise the gains thereof. This is my opinion. What do you say?
Let’s keep the discussion going. Thanks for your time. God bless!
By: Gershon P. Anumu (ACIB) l thebftonline.com l Ghana
The Writer is a Chartered Banker