Unsecured lending pleasure for banks, pain for people
HIDDEN away on page 35 of African Bank’s 60-page halfyear results booklet, buried under reams of statistics on unsecured lending, you’ll see exactly how this industry caused millions of South Africans misery — and created untold wealth for a handful of lenders.
This is revealed by the fact that African Bank’s average gross loan was R20 346, lent over 54 months to someone who had to repay R1 037 every month. This means that, on average, for every R20 346 Abil lent to a borrower, the borrower had to repay R56 000 — nearly three times the amount borrowed.
Typically in unsecured lending, the borrower will spend the money on consumables. The purchase of a house or a car would be financed through a (cheaper) secured loan.
At the end of 54 months, the borrower may have little to show for the money they must repay African Bank. On the other side of the coin, African Bank’s shareholders and funders will have scored.
It is true that African Bank’s loans are cheaper than those of some more unscrupulous lenders. Its longer-term loans, which peak at R184 000 repayable over 84 months, come with an effective cost of credit of 35%-45% a year, depending on the client’s risk profile.
It gets worse. Lenders who focus on “short-term loans” of under six months, or who bundle their credit agreements with unnecessary and costly credit insurance products, could realistically hit their borrowers with a cost of 70%-100% of that loan every year.
For African Bank shareholders, those giddying levels of profit are now at risk.
At a presentation to investment analysts early this week, African Bank CEO Leon Kirkinis tried to explain why, despite the hefty repayment terms, it made a nasty R4.4-billion loss. Fewer people taking loans, he explained, were able to repay. In banking jargon, this was dubbed “elevated NPL (non-performing loan) formation”, which becomes pretty gruesome when you add the phrase “pressure on collections”.
Kirkinis, who is clearly under pressure, spoke to investors about slow economic growth, a high inflation rate and pressure on disposable income.
“It’ll probably remain pretty challenging for the next two years,” he said.
With this formality aside, the rest of Kirkinis’s two-hour presentation focused on the technical details concerning PLs (performing loans) and NPLs.
Virtually nothing was mentioned about the people who form Abil’s core market, and the fact that the bank’s real problem is that many of them are now chronically indebted.
It becomes easy to think of Abil’s millions of customers not as humans so desperate for money that they will repay R56 000 on a R20 000 loan, but simply as NPLs who might, fingers crossed, become PLs.
Deborah Solomon of debt counselling body DCI, whose work ensures she knows the faces behind the NPLs, warned that this dehumanised approach spawned huge socioeconomic problems.
“For many platinum miners, the strike makes little difference to their lives because garnishee orders meant many of them had been taking home hardly any money when they were working,” she said.
For many borrowers, the complicated documents they had to sign to get loans were not in their first language, she said.
Solomon said she met thousands of people whose lives were ruined in their attempts to repay unsecured loans they should not have got in the first place, even though lenders were theoretically prevented from granting credit “recklessly”.
A Business Times analysis of many of the cases she works with showed that many unsecured lenders played fast and loose with the National Credit Act.
In many cases, people were able to get several loans from the same lender, even though it was apparent they could not afford the credit.
While government put in place a National Loan Register so lenders could see how many loans someone had, this register is badly administered by the hopelessly under-resourced National Credit Regulator.
Solomon said that government’s tougher credit laws, at least, meant “I can win cases in court that I would not have won years ago”.
Analysing the financial statements from the lenders themselves, however, paints a picture of a nightmare existence for borrowers who, despite making regular repayments, are never able to reduce the debt below the original loan amount, partly thanks to all the extra charges, such as “origination fees” and “credit life insurance”.
And when someone cannot repay, companies such as African Bank get garnishee or emolument attachment orders, which allow them to push to the front of the queue and get “repayment” deductions directly from someone’s salary.
“The banks have failed our economy. They were supposed to educate consumers. Instead, they spent a fortune on marketing easy credit so that they could boost their bottom line,” said Solomon.
The dust is now settling on the fantastic rise, and ungainly fall, of the unsecured market, which allows experts to tally the real cost on the people who paid for the profits.
Speak to any executive from a company such as Abil or Capitec, and they’ll unanimously argue they’re doing society a “service” by bringing access to credit to a market that never had access to it before.
In theory, it may be true. In practice, it becomes impossible for borrowers to actually leverage the credit — which comes at a cost typically north of 40% a year — to meaningfully change their financial quality of life over the long term.
Experts say that the unsecured lending boom had worked as a funnel extracting almost every last drop of disposable income from the precise segments of society where more, not less, money is needed.
The numbers are chilling: every second person is now overindebted — and likely to remain that way for years.
In an interview this week, Abil chief financial officer Nithia Nalliah acknowledged that lenders, including his, had to “absolutely” take responsibility for the impact that the pursuit of profit has had on customers.
“It is not customers’ demand; it is the supplier that caused the problem” by extending credit too aggressively, he said.
“If you look at it, it is all the credit providers. We created an artificial growth in the economy, which resulted in a boom in the retail sector,” said Nalliah. Now retail growth is flat.
The reality is that South Africa’s economy is due for a prolonged hangover thanks to the country’s unsecured lenders having vastly increased their loan values and terms during the boom.
Households are now likely to struggle to repay the superexpensive debt they accrued over the past five years.
Nalliah said that this would create a drag on the wider economy.
“I’m not sure [whether it will be] for a decade, but it’s going to be a while,” he said.