The Agricultural Finance Corporation (AFC) has turned to credit reference bureaus to speed up recovery of money lost to loan defaulters and strengthen appraisal of borrowers.
In a public advertisement published yesterday, the corporation stated that it was giving a 90-day ultimatum for borrowers who had arrears to clear or risk being listed with credit bureaus, which will limit their future access to credit from formal lenders.
The corporation has hired Metropol Credit Reference Bureau (CRB) to rate its borrowers.
AFC gets Sh1 billion annually from the government to provide loans to farmers at a subsidised rate but the fund has been dogged by cases of default.
Last year farmers owed AFC about Sh1.8 billion, a figure that was expected to rise after poor weather hit harvests during the year.
"Those who will not have regularised their accounts within 90 days from the date of this notice will have their account details forwarded to the Metropol Credit Reference Bureau for listing," said the corporation's MD, Lucas Meso.
Chief executive of Metropol CRB, Sam Omukoko, said prompt payment of previous loans, length of the credit history and amount of total debt in relation to income are some of the factors that determine an individual's credit rating.
"A good rating is essentially meant to impact on price and collateral demand," said Mr Omukoko.
Commercial banks and other financing institutions that rely on credit reference bureaus are expected to decline loan applications by persons who are listed as having defaulted on loans.
To hedge against defaults owing to losses caused by poor weather AFC started insuring loans given to farmers last year.
Owing to its financing by the government, some farmers had taken the loan facilities as grants, an attitude that has also been blamed for the defaults.
Farmers are charged between five and 15 per cent interest rate per annum on the principle amount plus other penalties in case of default a low rate compared to the current commercial banks average effective rates of 27 per cent.
The corporation will also use the credit reference bureau to rate an individual's character and credit worthiness which it will use to determine loan pricing.
"The corporation has partnered with metropol to assist farmers with good credit profiles to access affordable credit through the roll-out of character-based loans," said Mr Meso.
AFC will be the second institution after Kenya Industrial Estates to start giving character-based loans.
Commercial banks, which already share loan default information, are yet to start giving loans based on on borrowers' credit ratings but rather use the default information to penalise borrowers.
Management of the quality of its loan portfolio would see AFC able to finance more farmers joining the league of other credit institutions such as Higher Education Loans Board and Youth Enterprise Fund that have been successful revolving funds.