Bingeing on credit
Recently released credit figures show that unsecured lending seems to be dominating credit growth once again this year.
Offering loans without security – credit without collateral – is the calculated risk that lenders take with the expectation that bigger margins will cover their earnings. But each year, unsecured lending and installment sales credit (like motor vehicle financing) seem to massively outstrip mortgage lending, suggesting there’s a lot of borrowing but it’s not going towards productive assets. Credit growth reached a four-year high in December last year.
Private sector credit has risen to a near-term high of 10.1% each year, at its highest rate of expansion since February 2009. But people are rushing to take our short-term personal loans – unsecured credit is rising by about 39% a year (it rose to R140bn in the last year).
Mortgages credit, however, showed very modest growth, rising by just 1.9% from last year – very low by historical standards and entirely consistent with what’s happening – or not happening – in the residential and commercial property sectors.
Residential property development generally boosts much-needed economic growth. Mortgage advances account for about 45% of total private-sector credit, but they are showing their weakest growth since the 1960s.
A systemic risk to banks?
Banks may take calculated risks entering the unsecured lending space, but at what price? They can charge more for unsecured lending but consumers are massively over-indebted and they may not be able to service their debts as it is.
According to John Loos, household and property sector strategist at FNB, National Treasury has posed some questions to banks about how they intend to manage unsecured lending growth – it may have an impact that could see banks curtailing this growth a little.
As Johny Lambridis, portfolio manager at Element Investment Managers, says, the banks themselves are now soundingmore cautious, whereas a year ago they were brushing off concerns and suggesting there was an overreaction to the possibility of an unsecured lending bubble.
Banks like unsecured loans because they have a shorter maturity period than home loans, which will work in their favour when it comes to meeting Basel III liquidity requirements in the future. But from a regulatory and moral point of view, they should be considering the effect on the consumer and, by extension, the effect on thesustainability of their earnings. It’s one thing to make great profits fromunsecured lending over three years, but quite another if those profits are all wiped out consequently. (Home loans saw a similar wipe-out post-2008, when all the big profits fell away.)
“There is currently an information asymmetry between a lender and a borrower in the South African market, given poor education levels”, say Lambridis. “Lenders should ensure they are not exploiting this asymmetry, otherwise they are likely to attract more regulation.”
Chatting to Luke Hirst, MD of DebtBusters, it appears the average DebtBusters client has 14 credit agreements, compared with nine four years ago. Electricity costs have more than doubled over the past five years and will increase more than inflation for the foreseeable future. School fees, medical aids, food prices and fuel have increased above wage inflation for the past five years, meaning the average household is struggling to make ends meet.
In 2008, the prime lending rate was at 13.5% and by 2012 it was at 8.5%. That’s a 5% decline, which means mortgage interest has declined, too, to the benefit of homeowners. However, during this same period, the increase in the homeloan debtors’ books has hardly increased (up by a mere 13%) whereas the gross debtors’ book for unsecured debt has increased from R46 billion up to R140 billion over the past four years (as at the third quarter).
Consumers have been using unsecured debt to keep on top of their living expenses, but what is now happening is the interest and other charges on these agreements are eating into consumers’ monthly budgets. Little wonder, then, that households are increasingly turning to debt counsellors to extricate them from debt. Consumers really need to start making this decision earlier on in the debt cycle.
“The National Credit Act, which is over five years old now, needs some amendments – and I believe amendments will be coming soon,” says Hirst. “In the meantime, we need more standardisation in areas such as the affordability calculation and credit life insurance policies Currently, you can apply for, say, a R5 000 loan over the phone without having to prove your monthly expenses.” Easy money? Not if you know what you’re getting into (and what you can’t get out of later on).
Editor's thoughts:
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