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Banks' ‘extra’ advances questioned

Cape Town – The practice of banks making personal loans to clients to finance property is to be investigated by the National Credit Regulator (NCR).

Rajeen Devpruth, statistics manager at the NCR, said this is one of the questions that needs to be answered by the research into unsecured consumer debt launched this week.

According to him, the NCR uses “unsecured consumer debt” mainly to refer to personal loans, and it is the increase in such loans that is causing concern. Unsecured debt includes credit card and overdraft facilities.

Several analysts are worried a bubble could develop as a result of the sharp increase in unsecured consumer debt over the past two years.

In last month's budget review the National Treasury referred to the shift that had occurred in the composition of household debt, with a contraction in home loans and a rise in unsecured debt.

In the third quarter of 2011 unsecured loans made up around 21% of new credit approved, and mortgage loans 30%.

At the end of 2007 these figures were respectively under 8% and 52%.

Treasury said the trend needs to be monitored to ensure that consumers' increasing dependence on unsecured debt does not lead to systemic risk.

The NCR said the research is necessary to uncover the reason for such a steep rise in unsecured loans.

Purchases of property by means of personal loans could explain this shift. In the past week Sake24 investigated cases where clients who had approached one of the four big banks for mortgage finance were offered personal loans and credit card facilities as supplementary finance.

Devpruth was asked whether the NCR was aware of this practice.

He said this also happens when consumers apply for vehicle finance – a practice which will also be investigated in the research.

Rhys Dyer, chief executive of bond originator ooba, reckons the shift in household debt is related rather to a “significantly lower level of new mortgage loans being approved compared with historical trends, while there has been an increase in the demand for unsecured loans”.

In his view unsecured loans are used to finance living expenses and improvements to existing properties. Instead of buying new properties, homeowners are inclined to refurbish existing properties. They use unsecured loans to that end, he said.

Dyer believes that the reduced level of new mortgage loans is related to lower activity in the property market, together with stricter lending criteria for such loans.

He is unaware of any practice of offering personal loans or credit and overdraft facilities as supplementary finance for mortgages.

Unsecured loans, however, are to banks' benefit.

“From a bank’s perspective it is more expensive to finance a 20-year mortgage than a short-term unsecured loan.”

The interest rates on unsecured loans are higher, and there is less price competition than in the case of home loans. “Consequently banks’ returns on unsecured loans are better than those on mortgages, as long as bad debt is kept under control,” he said.

Banks’ stricter deposit requirements mean that people wanting a home loan have to put down a bigger deposit than was previously the case, he said.

This can be seen in the banks' average loan-to-property-value figure of 83% compared with 94% when the property market was at its height.

“Many people prefer to finance the deposit by means of an unsecured personal loan. We believe the shift has to do with the change in market activity and stricter deposit requirements,” said Dyer.

First National Bank property analyst John Loos said the shift in household indebtedness may possibly to some extent be attributable to buyers using short-term debt to pay the deposit on a house, but he does not believe that households are generally using unsecured credit to buy homes.

In the light of last year’s strong growth in retail sales he believes that a large part of the increase in unsecured credit has been due to finance consumption.

“I am much more concerned that this type of debt is being used to support a lifestyle that people can no longer afford, such as private schools and expensive holidays,” he said.

The high level of domestic indebtedness worries him.

The ratio of debt to disposable income is currently 75%.

For that reason he believes unsecured loans are increasing too rapidly. “Credit growth should be restricted for a number of years to ensure that the ratio of debt to disposable income falls at least below 70%,” he said.

Loos reckons the Reserve Bank should from time to time use monetary policy instead of consumer price inflation to keep lending within acceptable limits.
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