Bad debt spiral to get worse

Johannesburg - South Africa's own credit crisis is probably having a little more impact than people would care to admit, and the bad debt spiral will get worse over the next two quarters before finding some relief. But more normal lending by banks should resume again towards the end of the year once job losses turn to job gains and the property market improves.

This is the view of chief economist from Investment Solutions, Chris Hart, who was reacting to news that South Africa's middle class, who are finding it ever harder to get personal loans from banks and other financial institutions, are reportedly turning increasingly to microlenders.

Hart says a question that must be asked is whether banks are tightening their lending criteria irrationally or if a bigger problem is lurking.

"Even with the National Credit Act, someone who was getting credit a year ago is not getting credit at the moment," he said.

While South Africa is also expected to suffer job losses due to the global crisis, Hart says banks will take heed when job losses turn to job gains towards the end of the year.

Another key underpin for the turnaround will be when the property market turns, which Hart also expects to start happening at year-end.

Hart emphasises: "What we are seeing in South Africa is not anything like in the US or UK."

Eddie Stoop, CEO of the Elite Group in the micro finance industry said on Tuesday that the past six months had seen record numbers of individuals who previously borrowed from banks turning to the microlending industry because they were being turned away by banks "in droves".

"In large measure thanks to the new National Credit Act, but also due to the downturn in the economy, banks have become very wary in granting loans. One expert has estimated that up to 80% of smaller loan applications are being turned away by the big four banks."

Stoop said some banks were reporting a 50% increase in bad debt as R8.20 of every R10 a South African earns goes to pay off debt, or should.

He adds that the latest figures from the Bureau of Market Research (BMR) at Unisa shows that more can't pay and are sliding down a steep slope into financial despair.

Unisa research shows that the income group with the biggest debt burden earns between R500 000 and R750 000 a year. Their debt represents more than 135% of their disposable income and they use 34% of their disposable income to pay back debt.

Data released on Tuesday by Statistics South Africa shows that the total number of liquidations recorded for December 2008 increased by 68.4% year-on-year (y/y) to 347 after a 23.7% increase in November, data released on Tuesday by Statistics South Africa shows.

The data also shows that total liquidations in 2008 lifted by 4.7% to 3 300 when compared to the 3 151 seen in 2007.

The picture may not be good, as some good businesses potentially get turned away and banks could be accused of over-compensating in some cases, but the good news is that a corner could be turned come year end.

- I-Net Bridge