WE'D like to think Finance Minister Pravin Gordhan read our
cover story Hooked on debt (Finweek, August 30) and promptly sounded caution
over the rapid growth of unsecured lending and its consequences, not only for the
banking sector but for borrowers too.
We accept, though, that the timing of our story may simply
have been fortuitous and that there is a growing groundswell of opinion that
the rapid growth in unsecured lending could have devastating financial
consequences for millions of poorer households.
New research from Absa Capital shows how higher-income
earners have deleveraged since 2008 while poorer households, whose spending
patterns reveal considerably less discretionary spending than their wealthier
counterparts, are finding themselves increasingly indebted.
Gordhan is concerned that they may be getting caught in a
So is Johny Lambridis, a portfolio manager at Element
Investment Managers. Lambridis agrees that unsecured loans do only comprise 8%
of banks' total assets.
That would support the Reserve Bank's apparent ambivalence
towards the sector which on its own does not pose systemic risk to the
financial system. But, says Lambridis, South African banks are increasingly
dependent on unsecured lending as a means of generating profit growth and it is
there where the risk lies.
The profit margin on an unsecured loan can be 10 times
higher than that generated by a mortgage. The net interest margin on an
unsecured loan can be anything from 15%-20%.
They might only make up 8% of the book, but because they are
so much more profitable, they make up some 25% of the big four banks' net
interest income. Banks make only 5% of their profits from mortgages, even
though this makes up some 30% of their total assets.
"The high level of unsecured profits at a time when the
profits of homeloans are at a cyclical low, suggests that unsecured credit is
contributing approximately one-third of bank profits.
"We question if regulators did a similar analysis and
measured how the percentage of banks' income and profits from unsecured lending
had grown in the last three years, whether they would be so quick to dismiss
the possibility of a bubble."
A new report from Absa Capital states: "The outlook for
household indebtedness is increasingly concerning."
Economist Gina Schoeman says while the traditionally used
barometer of household debt to disposable income ratio may have declined from
its peak of 82.7% in Q1 2008 to current levels of 74.7%, it has been a
"soft deleveraging" as a result of household income growth over the
same period of time.
Following a meeting between Gordhan and bank CEOs in late
August, the Treasury issued a statement calling for prudence in lending
This comes against the backdrop of a warning from
recruitment and labour broking specialists Adcorp that South Africa is headed
for a jobs recession.
Employment numbers have shown five months of declines, and
technically, the South African economy would be in a "jobs recession"
if employment shrank for six months in a row. Adcorp labour economist Loane
Sharp cautioned that the outlook for employment remained weak.
That makes less cautious lenders more vulnerable to default.
Recent results and trading updates from dominant players in the microlending
space illustrate that they are taking the foot off the growth accelerator.
The concern remains, however, as to whether the damage to
personal balance sheets may already have been done. Default patterns over the
next two years will reveal whether the doomsayers' worst predictions of a
bubble in unsecured lending come to fruition or not.
Various surveys suggest there is an underlying problem. The
Bureau for Market Research's Consumer Financial Vulnerability Index shows that
consumers have slipped from being mildly to very financially exposed, while NCR
shows 46% of credit active adults have impaired records (ie they are more than
three months in arrears).
A recent Unisa study showed that while high income earners
who have reduced their debt are winners in tough economic times, low-skilled,
highly indebted consumers find themselves sinking ever deeper into financial
decrepitude, the results of which are amplified through the ever-widening
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