/ 8 July 2011

Unsecured credit spike raises alarm

Unsecured Credit Spike Raises Alarm

Unsecured lending is skyrocketing, setting off alarm bells at the consumer watchdog, the National Credit Regulator (NCR).

The spike comes amid growing concern over the high debt levels of South African households still struggling to shake off the global recession. In addition, unsecured credit increases the risk banks face should their customers default and requires that systems in place to manage this risk are rigorously adhered to.

The regulator, in its most recent consumer credit market report, released last month, pointed to the steep rise of unsecured lending, which leapt 67% year on year.

In rand terms, the increase went from about R10-billion to R16.7-billion between March 2010 and March 2011.

Typically, unsecured credit is personal loans to consumers with no surety against default, other than life insurance.

The total number of unsecured credit agreements soared by 49%, going from more than 713 000 to more than one million.

Loans of more than R15 000 experienced the most rapid take-up, rising 69% year on year, according to the report.

Meanwhile, those making the greatest use of unsecured credit facilities earn less than R10 000 a month, taking up 43% of the unsecured credit granted.

People earning more than R15 000 a month follow, taking up 31% of the unsecured credit granted, according to the report.

Under the provisions of the National Credit Act (NCA), banks and credit providers are permitted to charge a maximum interest rate, currently 32%, on unsecured loans.

The rate is much higher than that charged on other types of credit transactions, where loans are backed up by assets that consumers provide as surety against default.

Although the quarter-on-quarter change, from December 2010 to March 2011, showed a marginal decrease in the levels and values of unsecured lending, the annual change has prompted the NCR to take the matter up with the banks.

According to Rajeen Devpruth, the manager for statistics at the regulator, the NCR has noted its concern over the growth in unsecured lending and has held meetings with the market players on the matter.

He said the banks had indicated that they were increasing their loan amounts and loan terms on unsecured credit.

Before the advent of the Act in 2007, lenders could give out unsecured loans to a maximum value of R10 000 over 36 months, but were permitted to charge any rate, according to Devpruth.

The Act permitted unsecured loans for more than R10 000 and over a longer period, but interest was capped at the maximum rate.

But, Devpruth said, the Act had forced banks and other credit providers to assess a consumer’s ability to repay the loans to prevent reckless lending.

When it came to the maximum rate, Devpruth said that some lenders charged the full amount instead of using it as a guideline, although some loans could depend on the consumers and their credit history.

“These transactions are unsecured, therefore the lenders do price for risk,” he said.

“But there is nothing to stop consumers from negotiating or requesting lower rates. It is in the credit provider’s own interest to ensure the affordability of the loan.”

Nevertheless, he said, credit providers needed to be aware that the NCR was “watching this space”.

A formula based on the South African Reserve Bank’s repo rate is used to calculate the maximum interest rate that lenders may charge.

Compared with unsecured credit, mortgages rose only 18% year on year but experienced a quarter-on-quarter drop of almost 8%, according to the report.

A leader in the unsecured credit market, Capitec Bank, has aggressively targeted low to middle-income earners, who were traditionally ignored by South Africa’s big-four banks. But it is now facing competition from them as they are also targeting this market.

“Capitec Bank is certainly concerned about the manner in which loan tenures and sizes are being extended and increased,” said Charl Nel, the head of strategic communication at Capitec.

“The pitfalls of a sudden and irresponsible increase in undue credit risk have become apparent in both local and international markets over the past decade.

“Capitec Bank is cautious about the potential oversupply of credit to enthusiastic lenders and the large unsecured amounts being lent out and financed over longer terms.”

The issue had resulted in it heightening its focus on lending parameters and the quality and performance of its loan book, both of which were reviewed regularly.

Nel said Capitec’s entire loan book was unsecured and represented a 12% share of the unsecured and short-term credit market, but just 1% of the total credit market in the country.

He said that the bank’s approach had been to charge “the lowest possible rate, given the particular risk profile of the customer and not simply to price at the ceiling rate that the NCA allows”.

The rating agency Moody’s, in a credit opinion in April this year, noted that Capitec had increased loans and advances tenfold between 2006 and 2010.

It said that one of the chief impediments to the bank’s “risk positioning” included its high-risk product range, namely unsecured personal loans to lower and middle-income earners.

But, according to Moody’s, the bank was run according to “prudent risk-management practices”.

Moody’s highlighted Capitec’s credit-assessment process when evaluating customers applying for loans, which included analysing past behaviour, taking into account the customer’s income and assessing the affordability of the loan, living expenses and current obligations. Capitec also used an employer grading system, which assessed the financial stability of the customer’s employer.