Unsecured lending: The underwriting was on the wall
African Bank's plight seemed to come as a shock, but banks started tightening up credit a year ago.
The boom in unsecured credit saw regulation stacked in favour of lenders, which had a number of tools at their disposal to claw money back from overburdened consumers. But driven partly by a government crackdown on the runaway lending spree, banks – including African Bank – began to pull back on credit extension over the past year. And then the country’s largest unsecured lender went belly-up.
In just a few short years, unsecured lending changed from being a buzzword to a near swearword as lenders tightened the tap on this kind of credit.
The latest Reserve Bank’s Quarterly Bulletin shows growth in general loans and advances to the household sector (of which unsecured lending is the majority) began to drop sharply in 2013 and 12-month growth continues to recede, measuring just 3.5% in March, the lowest rate of growth since February 2005. This is in contrast to highs of annualised growth of 40% in mid-2011 and a boom throughout 2012.
But reports of reckless lending and abuse of garnishee orders became commonplace in headlines following the Marikana massacre. In August 2012 the Mail & Guardian reported how excessive and irresponsible lending had contributed to the socioeconomic problems experienced by workers on the platinum mines.
In November that year, the national treasury, following a meeting with the Banking Association of South Africa, made a number of commitments. These included formulating a standard to measure affordability that could then be incorporated into regulations and developing a framework for credit insurance practices that takes into account the full impact of all charges on affordability.
The treasury committed to engage with the department of justice about the abuse of garnishee orders and said it would suggest that their use be restricted to maintenance orders.
When lenders from mid-2013 began to tighten lending criteria, they publicly cited concerns about an oversupplied market and unsustainable growth rates as reasons.
But Jean Pierre Verster, an analyst at 36One Asset Management, said incoming affordability measures and caps on credit life insurance may have been a major factor, causing banks to tighten their lending criteria and to pull back on unsecured loans.
The first is the affordability criteria, which is to be objectively determined and applied to all unsecured lenders.
Secondly, Verster said, the capping of credit life premiums is also on the cards. Credit life settles any debts should the consumer die. “African Bank made extensive use of that and even owned the insurance company that issued it, which was exceedingly profitable,” he said.
Credit life also had the ability to enhance the yield of a loan. “Essentially, it allowed African Bank to extend loans to people who were high risk,” Verster said. But a crackdown on credit life could mean they could not charge the same all-in credit charge and needed to pull back on credit extension and tighten lending criteria, meaning less people would qualify, he said.
On August 1, the National Credit Regulator released draft national credit regulations, including regulations on affordability, for public comment.
“African Bank is very much in the news now, but the banks have been pulling back from this very notably since the second quarter of last year,” said Kevin Lings, chief economist at Stanlib. “It just stopped – the industry definitely made decisions to pull back.”
Unsecured lending increased between 2010 and 2012, but by 2013 “clear problems were starting to manifest”, said Lings.
“The banks started to look at the situation and started to scale that back. There was a notable fall in rate of increase by the end of 2013.”
This year unsecured lending has seen almost no growth, added Lings.
The supply may have been cut off but demand for credit remains strong as rejection rates reported by retailers such as Truworths and Foschini are persistently high.
Ian Wood, vice-chairperson of MicroFinance South Africa, said there is always a demand for credit, especially as consumers find themselves under pressure as the economy gets worse and inflation grows faster than real wage increases. “[But] credit providers see the economy is worsening and they are forced to tighten up scorecards and criteria.”
There are fewer credit-worthy consumers in tough times, he said. “You are going to lose the money one way or another; you have to tighten up in tighter economic climates.”