The Branch Manager's Overdraft Dilemma
Mwangaza Sacco's Kitui branch has a member, Peter Mutiso, who has run a wholesale kiosk for six years. His revolving overdraft limit is KES 800,000, secured by a chattel mortgage over stock and a personal guarantee from his brother. For 30 months he has serviced interest on time. In the last two quarters, turnover through the Sacco account fell from KES 2.1m to KES 1.35m per quarter. He is now KES 780,000 drawn, has missed two interest instalments totalling KES 41,000, and has requested a temporary increase to KES 1.1m to fund a supplier prepayment discount. The branch credit officer notes that a supermarket chain opened a branch 400m away in March. Peter's brother has informally told a loans officer he is 'not in a position to pay anything right now'. The Sacco's credit policy caps unsecured exposure at KES 500,000 and requires 150% collateral cover for limits above KES 750,000.
1. Assess whether the branch should grant the increase, restructure, or decline. Show the credit reasoning and recommend a course of action.
Read the worked answer
Position analysis
- Utilisation is 97.5% (780,000/800,000) - the facility is effectively fully drawn and the member is relying on it as term finance, not working capital smoothing.
- Two missed interest instalments (41,000) is the first hard signal of cash-flow stress; 30 months of clean history is a mitigating factor but is now stale.
- Turnover decline of ~36% coincides with a new competitor - this is a structural, not seasonal, shock. The prepayment discount does not fix a demand problem.
Collateral and guarantee quality
- Chattel over stock is a depreciating, mobile asset; forced-sale value is typically 40–60% of book. The 150% cover rule (needs KES 1.2m cover for a 1.1m limit) is unlikely to be met on a realisable basis.
- The brother's statement undermines the guarantee. A guarantee is only worth the guarantor's willingness and capacity; treat it as near-zero in the downside scenario.
Decision Decline the increase. Granting KES 300,000 more to a member already at 97.5% utilisation with missed instalments and a declining market is capitalising arrears by another name. Instead:
- Restructure the existing KES 780,000 into a term loan with a 12–18 month amortisation, so principal reduces rather than revolving indefinitely.
- Freeze the limit at current drawn amount; no further drawings.
- Require a current stock audit and a revised cash-flow projection; set a covenant that turnover through the account stays above KES 1.3m/quarter.
- Escalate the guarantee: obtain a written position from the brother or replace the guarantee with additional security.
- Classify the account as watch-list and review monthly.
2. The member argues that declining him will 'kill the business' and that the Sacco has a duty to support members. How should the branch respond, and what governance principle applies?
Read the worked answer
Response to the member Acknowledge the relationship, but separate support from additional risk. The Sacco's duty is to the whole membership - the deposits funding Peter's facility belong to other members. Adding exposure to a stressed account transfers risk from Peter to the wider membership.
Explain concretely:
- The restructure is support: it lowers the monthly burden and stops the account from being classified non-performing.
- The prepayment discount is speculative; quantify it. If the discount saves, say, 5% on a KES 300,000 order (KES 15,000), that is smaller than two missed interest instalments. It does not justify new money.
- Offer alternatives: a shorter supplier credit arrangement, or staged purchasing.
Governance principle
- Fiduciary duty to members/depositors and the prudence principle: lending decisions must protect the deposit base, not the borrower's feelings.
- Conflict of interest / related-party discipline: if any officer is close to the member or the brother, that officer should recuse from the credit decision.
- Documented credit decision: the decline and restructure must be minuted with reasons, so the decision is defensible to the Credit Committee and the regulator.
- Policy adherence over discretion: the 150% collateral rule exists precisely for moments like this; waiving it under emotional pressure erodes the control environment.