For a while now, the media has been awash with statistics on how many people have been listed as defaulters with the credit reference bureau by various banks.

What does it mean?

Previously, customers would borrow a loan from bank A, refuse to pay and move on to bank B to borrow. There then arose the problem of serial defaulters with bad loans in many banks. The idea of credit referencing was meant to cure this.

If you borrow a loan from one bank and default, the bank shares this information with a licensed credit reference bureau as part of your credit history. Once listed, this information is available to any other bank that you approach for a loan.

While being listed does not automatically stop you from getting any loans, banks that you approach for lending have to get a satisfactory explanation as to the cause of default.

How Do you Get There?

CBK Prudential guidelines require financial institutions to grade loans in five different categories.

Grade 1 loans are also called normal risk. This is the best quality of loans mainly for borrowers who pay on time. Every bank hopes to have all their loans in this category.

Grade 2 loans are classified as ‘watch’. This means that the customer is paying their loan with difficulty. The main feature is that the customer delays to make either or both principal and interest repayments for between 30 and 90 days.

Grade 3 loans are otherwise called ‘sub-standard’ loans. Here, the customer has delayed to pay their loans for between 90 and 180 days.

Grade 4 loans are also known as ‘doubtful’. To be classified here, the customer would have delayed repayment for more than 180 days but less than 360. The bank has doubts on ability to repay the loan as given maybe because your business has collapsed or you have refused to pay up. By this time the lender would have started the process to sell any collateral offered for the loan.

Grade 5 loans are classified a ‘loss’ to the lender. Here, the bank has given up any hope of the borrower paying back. If there was security, it has probably already been sold and the proceeds used to repay part of the outstanding loan. At this stage, the loan has remained unpaid for more than 12 months. The lender then proceeds to write it off against their profits.

Normally, your bank can list you as a defaulter at any stage between grade 2 and 5. This largely depends on internal policy and reasons for failure to pay. If your bank believes you have simply refused to pay the loan, you will be listed at the earliest opportunity. If however you work with your bank and show commitment to service the debt, chances are the bank will listen and try to accommodate your needs. Once all this effort fails, listing becomes inevitable.

It is important to note that once listed, the information remains part of your record for 7 years from the time you fully pay up.