Microlenders are experiencing a significant increase in the number of applications for loans as banks turn away customers.
Dr Eddie Stoop, chief executive of the Elite Group — a major player in the micro finance industry — said the past six months have been record months for the company, with growth in the double-digit numbers.
Nithia Nalliah, group chief financial officer at African Bank, said in the past six months it has seen an increase in applications from new clients. Of the 125 000 applications received in recent months, about 10% were from new customers.
Fred Steffers, managing director of the Consumer Profile Bureau, said that while there has been a decrease in requests for credit information from the banks, there has been a substantial increase in credit inquiries from microlenders, which would indicate increased turnover by this sector. All three companies agree that the upturn in business is due to banks becoming more risk averse as bad debts rise.
“In large measure thanks to the new National Credit Act, but also due to the downturn in the economy, banks have become wary of dealing with the bottom end of the market. One expert has estimated that up to 80% of smaller loan applications are being turned away by the big four banks,” said Stoop, adding that many new clients had come to them after being turned down by one of the top four banks. Nalliah said that, as bad debts rise, the banks will cut back on lending across the board with unsecured loans seeing the biggest cut.
“Approval rates have declined as well as the size of the loans and banks are now pricing these loans to the maximum,” said Steffers. He said banks are being hit by rising bad debts and there has been a steady in over the past 18 months in both insolvencies and adverse judgements, which confirms that consumer debt is busy catching up with consumers.
“The substantial increase in civil debt judgements, personal insolvencies and liquidations, coupled with the downturn in the economy, had scared many banks away from the unsecured loan sector. In many cases microlenders had picked up the slack,” said Steffers.
Although banks are suffering from the consumer credit crunch, Nalliah said the market segment African Bank deals with is a lot less sensitive to interest rates, but more negatively affected by inflation. “Most people who take unsecured loans do not have house or car loans, which is the area that has affected borrowers the most.”
Nalliah said the major credit push before the introduction of the NCA has come back to haunt the banks.
“People who take up credit offered through mail shots or SMSes are usually people who need the credit because they are already in financial trouble. These are usually the worst customers,” said Nalliah. He said the biggest impact on the microlending market is the increasing cost of living, especially transport. This is affecting affordability of loans and African Bank has had to work in higher inflation figures when calculating affordability.
“People tend to understate living expenses so we set a default living expense based on the level of income. We have been increasing that minimum to take inflation into account.”
Nalliah said that although African Bank’s rate of approved loans has declined due to affordability issues, it is still above 60%. The bank may offer a smaller loan or reduce the length of the repayment period. “We will still lend to you, which is why our total new loans have been increasing at a significant rate in the past six months.” The bank fixes its interest rates so that its customers know their monthly commitment and there are no surprises if interest rates increase.
Making bad debts worse
One of the reasons for the increase in bad debts has been the changes in the way debit order collections are managed by the banks. Prior to the National Credit Act (NCA), banks were able to deduct repayments from their clients’ accounts before they ran debit orders from other service providers, increasing their chances of their repayment being met.
Nithia Nalliah, group chief financial officer at African Bank, said since the NCA, banks have had to randomise debit orders so they are not always first in the queue. This has had a negative impact on African Bank, along with all banks. African Bank had a joint venture with Standard Bank which ensured that their debit orders were sent through first. Because of randomisation, African Bank’s bad debts increased from around 9% of their total advances book to over 10%. “This increase was not due to distress, but rather the change in the debit order system. We underestimated the impact on our clients. It has also been a driver of other banks’ bad debt.”