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TymeBank says it’s ready to roll out unsecured lending at full-scale from February 2020.
Several banks are growing their unsecured lending portfolios. African Bank, which came out of curatorship in 2016, is going to relaunch its credit card next year.
Among the established banks, Absa is starting grow its unsecured lending portfolio after years of being restricted by its former conservative parent company, Barclays. And FNB is advancing more personal loans to its higher earning premium clients.
Pursuing growth through lending
Unsecured credit, which includes personal loans, credit cards and other revolving credit facilities, is one of the most lucrative products for banks, because its interest rates are usually higher than that of secured credit, like home loans and car finance.
For banks that are starting out, it’s the lowest hanging fruit to enter the lending market, because they can lend smaller amounts to many people.
"There’s a symbiotic relationship between lending and transactional banking. I’ve been talking to few CEOs of other digital banks now and it’s clear to me that those that are only in the game of transactions and savings, they battle.
The margins are thin, customer adoption takes time. Lending becomes key," said TymeBank CEO, Tauriq Keraan.
African Bank CEO, Basani Maluleke, agrees: "Lending is regarded as one of the biggest contributors to a banks’ profitability, hence the focus on ensuring that the lending portfolio continues to grow," she said, adding that it must, however, be done in a responsible and well-managed manner.
Rising consumer indebtedness
On the other hand, the National Credit Regulator’s (NCR) credit bureau monitor showed that 10.2 million, or more than 40% of credit active consumers struggled to pay their accounts on time at the end of June. So; how can banks want to give more credit, especially unsecured lines where they cannot repossess anything if people fail to pay?
Absa’s managing executive of everyday banking in SA, Cowyk Fox, says the bank’s strategy is clear: "Our core target market is not short-term and/or payday loans." Cowyk says these short-term loans are generally perceived as a big contributing factor to the increasing number of consumers who are over-indebted.
"We have also taken proactive steps to reduce our exposure to higher risk customers during quarter four 2019 and started reducing some of the limit amounts we extend to customers," adds Cowyk.
The CEO of FNB Personal Loans, Emma Mer, says notwithstanding the tightening of lending regulations to protect consumers from over-indebtedness, banks are extending their own walls of defense to ensure they don’t get burnt by growth in unsecured lending.
"FNB uses internal data as well as credit bureau information for the assessment of applications. The extensive information available for customers that bank with FNB enables us to perform in-depth affordability assessments and decide based on the customer’s credit history, debt exposure, income and expenses," says Mer.
Maluleke, Keraan and Cowyk say their banks also look beyond consumers' payment behaviour now. Additional factors that banks consider before saying yes or no to loan applications include things like customers’ buying patterns that they get from retailers, as well as their own internal view on how the South African economy is expected to perform.
Changing unsecured loans customer profile?
As they factor in these other sources, more banks are approving lower-risk customers for personal loans than in the past. This partly explains why FNB increased loans to Premium customers by 49% year-on-year in its 2019 financial year.
Even African Bank, which established itself as a micro-lender before it was forced into curatorship in 2014, says 84% of loan customers on its books now are low-risk.
Capitec, which also traditionally lent money to customers who were excluded by the big banks, implemented stricter credit granting policies in 2016. Its results for the six months to August showed that 47% of its loans went to people earning more than R20 000 per month. Its portion of loans advanced to people earning less than R7 500 a month more than halved to 11% from 23% in 2016.
