Credit junkies receive an early warning

What would you do if your bank suddenly called in your overdraft? How would you manage if the credit limit on your credit card was halved?

South African consumers rely heavily on debt and credit and the prospect of losing credit facilities will leave the average consumer feeling very concerned indeed.

The South African Reserve Bank has just published a set of proposed amendments to the regulations governing South African retail banks. These proposals include changes to capital adequacy requirements. The entire proposed amendment is available on the Reserve Bank's website at www.resbank.co.za.

Given the new requirements, it is certain that local banks will have to give some serious thought to their credit policies going forward. And such reviews could impact on the amount of credit extended to local consumers. Individual borrowers should be aware that banks can recall overdrafts and lower credit limits if they so choose.

How does the capital adequacy requirement affect banks?

The amount that South African banks can lend is limited in that they have to maintain a certain minimum level of capital to cover the lending. The current capital adequacy ratio is set at 10% of risk-weighted assets held by the bank. Simply put, if a bank holds R1 million in assets, the total it could extend by way of credit to consumers would be R100, 000.

An additional requirement is that the amount of capital the bank must hold is determined by the risk-weighting of the lent money. This means riskier loans (such as credit cards and bank overdrafts) will increase the amount of capital the bank will have to hold. Current lending practices, particularly in the credit card market, are extremely risky given that such facilities are largely unsecured. The banks will, in most cases, be unable to attach consumer's assets to cover credit card debt.

Should banks be required to hold more capital against their loans, the logical approach would be for banks to reduce their exposure to risky credit- and focus on more secure credit such as mortgage loans.

Banks will have to hold capital against approved credit facilities

In previous years, banks could approve credit without affecting their capital reserve requirements. They would only adjust capital reserves when the approved credit was taken up. The new regulations, proposed to bring South African banks in line with Basel 2, require that capital reserves are adjusted as soon as the credit is offered. Analysts believe this will result in less credit being offered.

The interest earned on lending activities remains the main contributor to bank profit. Regardless of these proposed regulatory changes, we can be sure that the big four banks will take the necessary steps to limit the impact on their bottom-line.

This does not mean that consumers should tread less carefully.

Hundreds of credit card options

The local credit card market offers consumers hundreds of choices. Apart from the offerings of the big four banks, nearly every major retail outlet or service provider offers a card of its own.

A quick look at the available cards reveals an absolute whos who of large corporations. You can apply for an MTN, Vodacom, Virgin Money, Discovery, or Edgars credit card. And that's before you apply for the old favourites American Express or Diners Club. International bank, Barclaycard is also back in the market after a two year sabbatical.

With so many credit options it is hardly surprising that local consumers are suffering with the highest level of household debt ever recorded. And since consumers seem unable to curb their spending habits independently, it appears the banks might have to take corrective action for them.

Be warned, credit could become a great deal tighter in coming months.

Editor's thoughts:
Much has been written about the South African consumer's reliance on credit to get by. Can you do without your credit cards? Send your comments to gareth@fanews.co.za