Eyes still on debt risk
SA’s financial sector is in good shape, though high household indebtedness could pose a threat should the already sluggish economy deteriorate further, according to the International Monetary Fund (IMF).
High unemployment and inequality add to the threat, though the risk is considered “manageable”, the fund said after assessing the SA financial system last year.
The IMF’s “Financial System Stability Assessment” found that some of the vulnerabilities of SA’s banking system were exposed with the collapse of African Bank in August last year. SA’s largest unsecured lender, a subsidiary of African Bank Investments, was placed under curatorship after mounting bad debt led to record losses.
“Although its small size would have suggested no systemic implications, its problems are a reminder that asset quality can quickly deteriorate in a weak economy and even small institutions can entail systemic risk due to high interconnectedness,” the IMF said.
Annelie Schnaar-Campbell, head of regulatory impact and strategy at Standard Bank, says the bank concurs with the IMF findings on the threat posed by households struggling to repay their debts. Indebted households have been affected by sluggish global economic conditions and the increased cost of living, brought about by higher fuel prices, increased electricity costs and higher interest rates, she says.
She says, however, banks have implemented measures to counteract this. “The industry has responded with debt restructuring programmes and the monitoring and management of early arrears and credit loss rates remain a focus in the banks,” she says.
The IMF’s assessment, released in December, is intended to help countries identify risks to the financial system and implement policies to deal with financial shocks and contagion.
A large IMF team, in SA from April to June last year, evaluated the entire financial sector, including stress-testing six major banks and insurers. The stress tests assessed their resilience and financial strength in the face of economic shocks, such as higher than anticipated interest rate hikes, a recession or soaring inflation.
Stress tests have become more stringent since the 2008 global financial crisis, when many highly geared banks ran into trouble as they held too little “good” capital or lacked liquidity needed to survive a crisis.