Credit restructuring strategies, risk monitoring, and loan recovery of Commercial Banks In Nakuru County, Kenya

Abstract

The Central Bank of Kenya (CBK) has taken steps to address the pressing issue of loan recovery, by implementing measures like regulatory forbearance and proposed amendments to the Banking Act. Credit restructuring strategies gained prominence as a crucial tool for providing financial relief to borrowers during economic stress and enhancing loan recovery. Moreover, a lack of understanding regarding the effectiveness of the credit restructuring strategies in place could result in a suboptimal financial system in Kenya. Loan recovery trends extend beyond the banking sector, impacting borrowers, investors, regulators, and the broader economy. An effective loan recovery ensures financial stability by reducing the prevalence of non performing loans. The purpose of the study was to examine the moderating role of risk monitoring on the relationship between credit restructuring strategies, and loan recovery of commercial banks in Nakuru County. The specific objectives were: to determine the effect of extended repayment plan, interest rate reduction, principal forbearance, debt consolidation and balloon payment extension on loan recovery of commercial banks in Nakuru County, Kenya. Agency Theory and the Financial Distress Theory underpinned the study variables. The research adopted an explanatory research design. The target population comprised of 348 bank employees in the credit section drawn from 30 commercial banks. The sample size was 186 bank employees. Using SPSS Version 25, the researcher computed the descriptive statistics including frequencies, means and percentages, while inferential statistics involved the use of Pearson correlations and hierarchical regression analysis to determining the associations and effects between the study variables. The study findings indicated that the credit restructuring strategies specifically; extended repayment plan (β=0.846, p<0.05), interest rate reduction (β=0.229, p<0.05), principal forbearance (β=0.758, p<0.05), debt consolidation (β=1.086, p<0.05) and balloon payment extension (β=0.335, p<0.05) have a positive and significant effect on the loan recovery of commercial banks. Additionally, risk monitoring depicted an enhancing moderating effect on the relationship between; extended repayment plan (ΔR2=0.028, β=0.596, p<0.05), interest rate reduction (ΔR2=0.121, β=0.567, p<0.05), principal forbearance (ΔR2=0.08, β=0.758, p<0.05), debt consolidation (ΔR2=0.004, β=1.086, p<0.05), balloon payment extension (ΔR2=0.01, β=0.335, p<0.05), and loan recovery of commercial banks. In conclusion, the credit restructuring strategies, including extended repayment plans, interest rate reduction, principal forbearance, debt consolidation, and balloon payment extension, positively and significantly influence loan recovery of commercial banks. Moreover, risk monitoring strengthens the effectiveness of these strategies by further enhancing their impact. It is recommended for the commercial banks should adopt and enhance these credit restructuring strategies, particularly with robust risk monitoring, to improve loan recovery outcomes. Future research should consider other mediating and moderating variables that could impact the relationship between credit restructuring strategies and loan recovery.