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South Africas banking regulator isinvestigating unsecured lending by the biggest lenders amidconcern inflation and bad debt may surge in a country whereconsumers dont save and almost one in four is jobless. The analysis will examine the pace and causes of thegrowth, the banks that are doing the lending, and whether theborrowing is being used for consumption or capital spending,Rene van Wyk, who was appointed as South Africas Pretoria-basedRegistrar of Banks in October, said in an interview yesterday. The report will be issued in the second half -- next yearmay be too late, said Van Wyk, who previously headed the riskdepartment for the investment-banking unit of Nedbank Group Ltd. (NED)Unsecured lending remains a relatively small portion of bigbanks balance sheets, he said. The total value of unsecured loans by the third quarter of2011 rose 53 percent to 101.1 billion rand ($13.2 billion) fromthe previous year, according to South Africas National CreditRegulator. That represents 8 percent of all lending in SouthAfrica, up from 5.7 percent in 2010, the agency said. At thesame time, unemployment is 24 percent, the highest of 61 nationstracked by Bloomberg, and the central bank reported savings as apercentage of household income was zero in the third quarter.

Inflation Rising
The growth in unsecured lending may fuel spending andinflation, causing interest rates to rise more than expected,Annabel Bishop, a Johannesburg-based economist at Investec Ltd. (INL),said in a March 6 report that estimated South Africas benchmarkrepurchase rate may rise 250 basis points to 8 percent by 2014.With growth in asset-backed finance stalled, retail banks aretrying to maintain their loan book sizes by writing businessthat may prove costly to market latecomers, she said. South African Reserve Bank Governor Gill Marcus saidyesterday inflation may be becoming more generalized withdemand in the economy picking up, indicating policy makers maybe preparing to raise interest rates this year. South Africas four largest banks, which command almost 85percent of the market, including Standard Bank Group Ltd. (SBK) andBarclays Plc (BARC)s Absa Group Ltd. (ASA), have all reported growth inunsecured lending and say this will be a focal point this year.Smaller lenders Capitec Bank Holdings Ltd. (CPI) and African BankInvestments Ltd. (ABL) used to dominate the unsecured credit market,focused on low-income earners. Searching for profit, the biggestbanks are now competing for the business along with retailers,micro-lenders and insurers.

Responsible Lending
The key remains responsible lending practices with astrong emphasis on affordability and whether the customer canhandle the loan instalment, said Michael Jordaan, head ofFirst National Bank, the consumer banking unit of FirstRandLtd. (FSR), where total retail unsecured lending grew by more than 30percent in 2011. As we have noted rising inflation, we havesuccessfully tightened our credit criteria over the last year. While South Africas benchmark repurchase rate is 5.5percent, the fees for unsecured credit make it profitable forlenders and expensive for borrowers. For a six-month so-calledGlobal One loan of 3,000 rand, Capitec charges an interest rateof 40 percent, which means a monthly instalment of 680 rand anda total repayment of 4,082 rand, according to the lendersstated rates. For someone earning 10,000 rand a month and askingFirst National for 3,000 rand over six months, the monthlyrepayment would be about 709 rand, according to the banksonline loan calculator.

Basel III
To stop unsecured lending from becoming a bubble that couldthreaten the banks and the economy, the best for us as theSouth African Reserve Bank is what were doing: asking banks toreport to us on this and our analysis done on the informationprovided, Van Wyk, 55, said. Under Basel III, a global set ofbanking rules being implemented over the next six years, theregistrar can apply what is known as a counter-cyclical buffer,which means lenders would have to hold additional capital whenhis agency determines credit growth is excessive, Van Wyk said. While the number of secured credit accounts dropped 1percent in the 12 months to September 2011, according to theNational Credit Regulator, unsecured accounts rose 31 percent to7,074. Almost threequarters of unsecured credit consists ofloans of more than 15,000 rand and more than 60 percent of thoseloans go to people earning less than 10,000 rand a month, theagency said.

Very Good Sign


South Africa needs a risks benchmark so that certainindicators go red if theyre passed, Ettienne le Roux, RandMerchant Banks chief economist, said in an interview. The policy makers are well aware and focused on unsecuredlending so thats already a very good sign, he said, referringto Finance Minister Pravin Gordhans February budget review,which said trends must be monitored to ensure consumers growingreliance on unsecured debt doesnt create a systemic risk. Anecdotal evidence suggests borrowers are using unsecuredcredit to finance consumption as evidenced by both headyvehicle and retail sales growth, said Investecs Bishop. Somealso appear to be using unsecured credit to repay other debts, atrend that isnt sustainable unless wage increases climbsignificantly above inflation, she said. We do ask customers what the purpose of the loan is, butanswers are often generic and can sometimes be somewhatmisleading, said First Nationals Jordaan, adding that loansare typically used for housing, school fees and living expenses.Credit is a key market need and if a bank wants to play ameaningful role for their customers, its important to providethis service if you want to retain them. To contact the reporter on this story:Renee Bonorchis in Johannesburg at rbonorchis@bloomberg.net

To contact the editors responsible for this story:Edward Evans at eevans3@bloomberg.net