In a newly published report, the Finance Ministry, through the National Planning Authority (NPA), is proposing to scrap the 5% late payment fee which Uganda Development Bank (UDB) imposes on borrowers who go beyond 30 days without depositing the money after the monthly repayment obligation has fallen due.
In the 160-page report, that is aimed at recommending reforms that can improve and enhance UDB’s contribution to Uganda’s socio-economic transformation agenda, its being proposed that the 5% be scrapped because its too high and risks to further constrain the already liquidity-stressed private businesses. By the time a business enterprise comes to UDB seeking to borrow long-term financing, it means the liquidity situation is already bad and the entity is already struggling with cash flow problems.
The NPA report, that was instigated by the Finance Ministry’s desire to assess the impact of the billions which the GoU has been channelling out through UDB to support the private sector, shows that some of the UDB customers/borrowers spoken to during data collection revealed that sometimes they have to go to money lenders to relieve themselves of such burdens. These burdens include the loan appraisal fee (5%) and the late repayment penalty as well of 5%. The 5% is being characterised in the NPA report as very constraining to the SMEs and other investors involved in high-impact sectors like manufacturing and agro-industrialization.
The NPA impact evaluation report recommends that the late payment fee be scrapped and instead such liquidity-stressed borrowers be supported through arrangements like “credit accommodation measures such as loan restructuring and rescheduling.” This recommendation has a qualification whereby the NPA report proposes it should only benefit genuine defaulters and not fraudulent ones who might have a motive to defraud the Bank.
That even after abolishing or scrapping this late payment penalty, the Bank should introduce a clause in every loan agreement requiring fraudulent defaulters to pay some late payment fee but which should be lowered to something less than 5%. That UDB should benchmark and emulate other Development Finance Mechanisms (DFMs) like Post Bank/ACF and Microfinance Support Centre which charge as low as 0.42% and 0.5% respectively.
Asserting that 5% has the effect of heightening UDB’s lending rate from 12% to 17%, the NPA evaluation report authors make an illustration of a borrower of Shs3bn who genuinely might face difficult circumstances pushing him/her into default. He will end up being required to part with a late payment fee of Shs150m, whose payment the report shows would in effect undermine recovery of the business and overall repayment capacity. “This [5% late payment fee] should therefore be charged only in incidences of intentional default,” the report concludes.
In the alternative, fixed penalties should be imposed on large value loans as smaller ones be subjected to rates-based penalty fees. The report also demands for more transparency in the fixing of UDB’s penalty decisions policy for purposes of ensuring consumer protection and clarity.
