Bank warns of unsecured lending levels
The Reserve Bank has flagged a rise in unsecured credit levels, warning that it could point to distressed borrowing by households battling rising debt and weak income growth. Households account for 45% of all private sector credit extension, and the banking sector’s direct and indirect credit exposure to households could threaten the stability of the banking system, the Reserve Bank said in its most recent financial stability review. Reserve Bank governor Lesetja Kganyago warned of the risk of borrowers turning to the unregulated credit market in the wake of amendments made to the National Credit Act earlier in 2019.
The Reserve Bank has flagged a rise in unsecured credit levels, warning that it could point to distressed borrowing by households battling rising debt and weak income growth.
Households account for 45% of all private-sector credit extension, and the banking sector’s direct and indirect credit exposure to households could threaten the stability of the banking system, the Reserve Bank said in its most recent financial stability review.
“The distressed [borrowing] issue is a concern and it is something the Prudential Authority will need to watch carefully,” Hendrik Nel, the Bank’s head of financial stability, said at the launch of the review.
Though unsecured borrowing by this sector is not yet at levels seen in 2012 when it peaked at almost 30%, it has started to rise again since 2017.
In particular, general loans and advances, and credit-card use have risen sharply. In the first quarter of 2019 unsecured credit rose 10.5% compared with asset-backed borrowing such as mortgages, which rose 4.9% in the same period.
Household use of credit can contribute to the economy by supplementing income and boosting consumption, but the bank warned that “rising debt levels under conditions of persistently low growth and deteriorating disposable income raise concerns about households debt-servicing capacity”.
Household debt increased from the second quarter of 2018 to the second quarter of 2019, with households’ debt to disposable income rising from 71.6% in 2018 to 72.7% in 2019.
Growth in household disposable income steadily declined over the last five quarters, from 5.9% in the second quarter of 2018 to 4.7% in the second quarter of 2019.
This has also coincided with an increase in consumption spending, the Bank said.
“Given the vulnerability of the household sector ... it is likely that the rise in consumption expenditure was due to households taking on additional and more expensive debt to support consumption,” the Bank said in the review.
Reserve Bank governor Lesetja Kganyago warned of the risk of borrowers turning to the unregulated credit market in the wake of amendments made to the National Credit Act earlier in 2019.
The amendments, which were strongly opposed by the banking sector, potentially allow consumers who earn less than R7,500 a month, and who have up to R50,000 in debt, to have their debt written off.
But a socioeconomic impact assessment study done for MPs who passed the amendment, warned that the changes could backfire.
The changes could result in formal lenders tightening their credit requirements for this segment of the market, threatening the financial inclusion of 11.7million consumers, it was found.
The study contained the warning that the informal market dominated by loan-sharks and mashonisas stood to gain R7.6bn, as customers locked out of formal channels seek credit elsewhere.
If the banking industry is to
believed, said Kganyago, be
RISING DEBT LEVELS ... RAISE CONCERN ABOUT HOUSEHOLDS DEBT-SERVICING CAPACITY
AMENDMENTS TO THE NATIONAL CREDIT ACT WILL MAKE SURE THAT NO LENDING TAKES PLACE
unsecured lending is less of a worry now, as the regulated banking sector will stop lending to these borrowers due to the amendments.
“These amendments that have just been done to the National Credit [Act], will make sure that no lending actually takes place,” he said.
This does not mean these consumers will stop borrowing he said. Instead, they will “go to the unregulated sector and that is what we should be concerned about and the social consequences thereof”.