Regulator advised to limit growth in unsecured loans
Big banks do not sound alarm just yet
WHILE there appears to be some uncertainty about precisely how worried regulators should be about the growth in unsecured lending, there are signs that concerns are spreading as the major banks are enticed into the market by the significantly higher interest rates they can charge. One leading analyst contends that continued aboveinflation increases in unsecured lending totals could lead to a credit bubble.
Saijil Singh, an analyst with Coface South Africa, says that all indicators present an upward trend ahead of inflation, indicating appetites and access increasing faster than they should and if it continues there is a very real possibility of a “credit bubble”.
Singh believes that inflated house prices have aggravated the problem because they have raised the probability of default.
Small financial institutions, which have consistently underestimated the extent of risk, are particularly vulnerable to any change in the current “fragile macro-economic environment… and will not be able to weather the storm”, states Singh, who also expects the retail sector, especially creditorientated clothing sellers, to be hit badly.
However, while the larger financial institutions will see some profit losses and negative investor sentiment they “are expected to survive relatively unscathed”, according to Singh.
Taking a much more upbeat view of the market is Riaan Stassen, the chief executive of Capitec, which is South Africa’s fastest-growing retail bank. In March it reported a 68 percent rise in headline earnings and, at the time, Stassen offered several reasons why concerns about unsecured lending were exaggerated.
He noted that the objective of the 2007 National Credit Act was to make credit more accessible to the broader population.
“The formalisation and proper regulation of this sector of the market in 2007 has encouraged large players like all four of the traditional banks to enter the market and compete. We have in fact seen increased competition via distribution, price and service.”
Stassen argued that the growth should have been expected and was sustainable as higher income consumers were now taking unsecured loans.
He noted that credit granted to those who earned more than R15 000 a month had increased from 17 percent of the total in 2008 to 35 percent in 2011.
Other positive considerations include increased housing and electrification of housing, increasing numbers of employers not providing “payroll” lending anymore, and the comparatively lower interest rates and longer loan terms that are now available in the unsecured market, which means that consumers can borrow