By Ian Armitage
The unsecured credit market is a growth area for South African banks and according to those that know more and more of us, from all walks of life, are doing more of this type of borrowing.
If you don't know who or what the unsecured borrower is, they are individuals that take credit from a bank or lender, but have no security or collateral against the loan.
These loans are riskier, but they are highly appealing to banks, as they are allowed to charge more interest (however they are capped at 32 percent under the National Credit Act).
Although the banks love them many are worried by the trend, fearing that the local banking sector could be on the road to a meltdown.
According to credit information giant TransUnion Credit Bureau's latest Consumer Credit Index (CCI) South Africa's consumer credit health is deteriorating, and it blames a rise in the number of people using credit to fund short-term consumption.
The CCI fell into negative territory for the first time in more than three years in the third quarter of 2012.
"Our index was influenced by two factors: the number of consumer loan accounts that have lapsed - meaning 90 days in arrears - grew by five percent year on year. In addition, we are seeing a rise in the use of credit cards on year over year basis with utilisation increasing eight percent in 2012," says TransUnion Credit Bureau's CEO Geoff Miller.
He called the growth in unsecured lending "unsustainable".
So what does the chief of the Banking Association of South Africa think about it all?
"It's quite a hot topic both for government and for us," Cas Coovadia says. "In a meeting that we had with the Government Minister of Finance a few weeks ago it was still very much on the agenda. It has gone up considerably, but it still forms only between eight and 10 percent of total credit."
Mr Coovadia says that looming international regulation in the form of the Basel III banking accords and lower credit take-up from South Africa's cash-rich corporates are two of many reasons why South African banks seeking growth in the unsecured credit market. "In the broader sense unsecured credit is still a small proportion of total credit. Having said that, we are all concerned that is has gone up and we are certainly doing some work in the industry to understand the phenomena.
"Current trends indicate a range of reasons why consumers are taking up unsecured credit. For a start, banks had been more cautious with long-term loans. With banks less willing to extend 100 percent mortgages, for example, consumers were opting to borrow the difference through unsecured loans. Loan consolidation is another factor and a third trend involves consumers taking on unsecured credit to pay for building and renovations. Unsecured borrowing to pay for consumption or everything from food to clothes is perhaps more worrying. People are also borrowing unsecured credit to pay for education, furniture and that sort of thing. Regardless of what it is being used for, I think that banks to a certain extent are beginning to shift their business models in anticipation of Basel III where long-term lending is going to become quite difficult. It all depends on Basel III and how it is implemented - and we are talking to the authorities about that - but they are to an extent anticipating a need for a shift."
How worried should we be? "Most of my members tell me that 90 percent of the lending is to existing customers. We've agreed with the National Treasury, the Reserve Bank and with credit regulators that we will watch this and constantly get data to ensure that we're not getting into any problems and when we do pick up problems we will deal with them together. That's where we are and it's something that we need to watch. We don't want it to grow into a situation where it becomes irresponsible. It's a trend that we will keep on top off."
Okay, so that's the spike in unsecured credit covered but how about the euro crisis? What's the latest there? "It's a roller coaster ride still, but any bit of positive news we will obviously take very well. Europe is one of our biggest trading partners and while the banking sector in SA has withstood the crisis reasonably well, business activity has gone down because our economy has contracted as a result of the problems in Europe. It is obviously a concern to us from a growth point of view and it's something that we watch very carefully. Our government through the G20 and other structures are obviously in discussion related to this. The government has committed $2 billion towards the IMF firewall to stop the crisis spilling over into the rest of the world.
"The longer it takes for problems there to be resolved however, including the problems in the banking sector, the more the threat of additional regulations and that has a knock-on effect on our sector. It is of interest to us and we're watching it very carefully to see what the continuing impact could be. SA is beginning to shift our trade relationships to Asia and that takes a long time. We'll only begin to see the benefit of that in a few years. What happens in Europe is critical to us."
Coovadia says the banking sector plays a central role in supporting South Africa's real economy and went on to explain that more probably needs to be done to support it.
"Overregulation is always a concern; we need some sort of coordination and appropriate regulation to enable the banks to continue to grow, to enable them to remain at the cutting-edge of international best practice," he says. "The sector also has a vital role to play in the ongoing transformation of our society, and our desire to bring a better life to all of our people. We certainly have raised issues about regulations in the sense that there are a plethora of regulations in the banking sector coming from different departments. What we're calling for is greater coordination around that.
"There's no doubt that the regulatory burden is increasing because of the uncoordinated regulation but also because of Basel III and those sorts of things. At this point in time we don't see a significant change in policy, despite the rhetoric about nationalisation."
Coovadia says the relationship between our banks and the Government is "very good" and that "meetings take place regularly".
"Discussion is always important. For example when the ANC's economic policy discussion documents were released ahead of the ANC's policy conference in June, we felt it appropriate to meet with them (members from the ANC economic transformation committee) and had a meeting, a closed meeting, where we discussed some of our views on the policy documents. We discussed a range of issues. It was in good spirits and there was an understanding that, for national agenda issues, we need to meet more often and work together to enable the banking sector to play a role in partnership with state-owned institutions and other entities to develop financial services and to participate in things like the financing of the infrastructure programmes Government has unveiled."
Coovadia says that although there weren't fundamental changes, the dialogue was useful.
"At a policy and regulation level we need to separate what's really happening form the rhetoric. Fundamentally there hasn't been a significant policy shift from the ANC.
With our interaction with the ANC we feel that there's an indication that the government is thinking about making interventions in the economy where the market has not succeeded in addressing some of the critical social problems that we have. We don't have a problem with that, provided the intervention is in areas where there is market dysfunction."
The future, then, is bright.
"It is, but we need to ensure that we maintain the right balance to ensure we maintain, if not improve, our position; we don't want to fall behind others in the global marketplace," Coovadia says. "One very interesting area for the banks today is infrastructure development. In fact, we had our annual banking summit on August 21 and the theme was infrastructure finance."
South Africa's R3.3-trillion infrastructure plan, announced by President Jacob Zuma in his February State of the Nation address, created significant opportunities for banks.
"Many infrastructure projects in South Africa have a social and commercial component, and therefore a hybrid financing approach is required," Coovadia says. "Government has identified 17 strategic integrated projects in sectors such as energy, transport and logistics to schools, hospitals and nursing colleges to be constructed between now and 2020. I think the financial sector has to be considered as a strategic partner in enabling the sustainability of infrastructure projects and we need sustainable funding models for these projects. I think also that engagement must take place earlier, before the costing and funding models are determined.
"We are saying that we would like to sit down with the presidential infrastructure coordinating committee to identify three or four out of those 17 projects that are critical. Let's put technical teams together from both the public and private sector around those three or four projects and get them to actually develop sustainable financial models. Let's get away from the rhetoric and get concretely on the ground with these projects. So that's the process we've start. We want to be involved and we believe we can make a contribution. "
So what's next for our banks? "Everyone's looking at Africa," he says. "Africa has been seen as something more than a curio in global investment terms since 2007, when the Industrial and Commercial Bank of China bought up a 20 percent share in Standard Bank, South Africa's biggest lender, for $5.5 billion. Africa is flavour of the day. If you look at Standard Bank, they have cut down on other global activity and are saying that they want to focus on Africa.
"The continent is becoming more and more competitive, and there are broadly two sorts of banks operating in Africa. First, the biggish locals and then you have the Western world giants like Barclays, Citigroup and Société Générale.
"African economies are expanding rapidly, while steadily increasing consumer affluence is creating fresh demand for banking services. There are challenges, but also undoubted opportunity. The opportunities in Africa are certainly very good."
The banking sector is critical to any economy. South Africa has a developed and well-regulated banking system, comparable to that of any industrialised country. Our system is world class, with adequate capital resources, technology and infrastructure, as well as a strong regulatory and supervisory environment.
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