Factors influencing management of credit risk for micro and medium enterprise loans a case of equity bank Thika branch, Kenya.
There has been an increased concern over high credit risk for micro and medium loans in financial institutions. High interest rates, collateral's for micro loans, credit rating, business experience and training, and loan recovery play an important role in managing credit risk for micro and medium loans. The objectives of this study was to establish the influence of interest rates on credit risk management of Micro and Medium loans in equity bank limited, to find out the influence collateral's play in credit risk management of Micro and medium enterprise loans in equity bank, to assess the influence of business knowledge and experience in credit risk management of Micro and Medium enterprise loans in equity bank, to find out the influence of credit rating in credit risk management of micro and medium loans and to find out the influence of recovery mechanism on credit risk management of micro and medium enterprise loans in equity bank limited. The study utilized descriptive research design and employed stratified random sampling to select a sample of 80 customers from a target population of 5200 customers of Equity bank in Thika town. Both primary and secondary data was collected through interviews, questionnaires and review of existing bank and central bank records. The data collected was analyzed using both quantitative and qualitative methods. Frequencies, graphs and proportions were used in presentation and interpretation of data. Use of Statistical Package for the Social Sciences simplified data analysis. The study found out that as interest rate went up, credit risk increased as the business profitability was reduced by high interest rate at times making it impossible to breakeven. Collateral was found to influence credit risk management. Where customers felt that security used for the loan was adequate, the rate of default was low. Similarly business knowledge and experience also influenced credit risk management. Most of the non performing loans were for those customers who had less business experience at the time of borrowing. Another factor influencing credit risk management is credit rating. It was found out that customers with a good credit history were less likely to default. Recovery mechanism is another factor influencing credit risk management. It was found out that many non performing customers paid after legal action was instituted against them. The research concluded that interest rate affects customers’ repayment ability and consequently default rate. Similarly when adequate security is used, risk of default reduces since in event of default, the pledged asset can be sold to recover the amount lent. The study also concluded that customers with more business experience are less risky to lend to compared to customers with little or no experience. Similarly customers with a good repayment history are less risky than customers with a poor credit history. The study further concluded that a good recovery mechanism reduced credit risks. The study recommended that, lending institution should carry out a comprehensive market survey to identify an interest rate commensurate with the prevailing business environment. Lending institutions should also ensure that the loans are adequately secured. The institutions should be cautious in lending to customers without business experience or without existing businesses. The institutions should also mitigate against lending to customers with a poor credit history. Recovery mechanism should be planned and instituted promptly in the event of default.