Debt is a big story these days. If you doubt this, ask any Greek.
In South Africa we know two things about debt. One is that our banks were able to escape the worst of the global financial meltdown, the other is that we have struggled in the recessionary conditions that followed the meltdown, that jobs have been lost and that increasing numbers of South Africans have been seeking debt relief through counselling.
Errol Kruger, the registrar of banks, presented his annual report on banking supervision last month.
Total South African impaired advances or non-performing debt stands at a whopping R134-billion but any number, no matter how big, is pretty much meaningless by itself. In this case, when compared with the total loan book amount of advances of R2.3-trillion, impaired loans are 5.8% of total, a slight decrease on the 5.9% the previous year.
Kruger reported that South Africa’s banks were adequately capitalised at 14.9% and profitable, with a 14.7% return on equity and a 1% return on assets. He flagged as an issue the fact that impairments were not decreasing in the more favourable interest rate environment but concluded that the banking system remained safe, stable and sound during the reporting period, the past calendar year.
Kruger said that impairments were not decreasing because lending policies before the implementation of the National Credit Act (NCA) in 2007 were too lax. Rajeen Devpruth, the manager of statistics at the National Credit Regulator, said total consumer debt stood at R1.19-trillion.
The amount had passed R1-trillion by early 2007, when the regulator started keeping records. But it is the heady growth of total advances by banks before 2007 that is really startling.
Devpruth quoted Reserve Bank figures that showed that advances had grown to top R1-trillion in 2007 from a relatively modest R300-billion in 2002. He said there was a drive to expand credit in anticipation of the implementation of the Act.
South Africa was now an international leader in credit regulation and received regular Âvisitors, including from China, to study its system, he said.
The R1.2-trillion was owed by 18.35-million consumers holding 35-million accounts. As of December 2010 most of this debt, 64%, was in mortgages. The rest was in secured vehicles and furniture (18%) and credit facilities (11%), with 6% being unsecured loans.
Of gross loans outstanding, 90% were held by banks, with vehicle dealers (3.3%) and retailers (3.1%) making up most of the rest. Devpruth said the number of consumers with impaired records had increased by 430Â 000 to December 2010 compared with a year previously.
Of the 18.5-million consumers who had active credit accounts in December 2008, 7.3-million were impaired. This figure had risen to 8.6-million by December 2010. This sounds alarming: nearly 50% of all accounts are impaired, which means that there is some kind of default or late payment.
Credit providers were advancing nearly R100-billion of new credit a quarter in 2007. This halved to R50-billion a quarter in 2009 after the global financial collapse but advances increased to more than R80-billion in the last quarter of 2010.
It would appear that the system has gone berserk, with banks handing out more and more money to consumers who are unable to pay.
But Devpruth said impairments were registered by account, so a consumer could have four or five healthily performing accounts and one non-performing one. He or she could then show up as impaired. He said a bank would assess the full picture before deciding to make a new loan.
The picture improves if you consider the percentage of accounts in good standing, 74.5% in December 2010, even though the figure is down from 78% in March 2008. In mortgages 89% of accounts are performing, a steady increase from a low of 87% in 2008.
Of R760-billion outstanding in respect of mortgages, R54-billion is overdue by more than 120 days.
The regulator has had a flood of people wanting to use its debt counselling services. More than 240Â 000 consumers have applied for counselling since the regulator set up operations. It currently receives 6Â 000 new applications each month.
National Credit Regulator statistics show that on average the over-indebted consumer has nine credit agreements. About 65Â 000 consumers pay R230-million a month, or R3-billion a year, to creditors as part of approved debt counselling.
There may appear to be significant distress in the system but banks are lending again, albeit at lower levels than in the heady days of the last quarter of 2007. The regulator’s figures show that mortgage advances then stood at R53-billion for that quarter compared with just R26-billion for the last quarter of 2010. But this is well up on the R17.6-billion advanced during the second quarter of 2009, after the crash.
The picture has changed since the crash, though. Mortgages then made up 52% of advances, secured credit 32%, credit cards 8% and unsecured debt 8%. Now they make up just 32%, secured credit 32%, credit cards 12% and unsecured debt (such as personal loans, which can carry interest rates as high as 32%) 20%.
In money terms unsecured credit granted has nearly doubled from R8-billion in the last quarter of 2007 to R17-billion in the last quarter of 2010.