Cashing in on indebted consumers

Traditionally, banks have made their money through bigger, longer-term loans that are secured to assets such as property and cars. However, slow growth in the mortgage market means larger players have moved into the new territory of unsecured lending and short-term loans and are fast encroaching on the bread and butter of microlenders.

First National Bank's annual results, released this week, showed that its net interest income grew by 19%, driven by growth in unsecured lending.

Microfinanciers say the cards are stacked against them as banks source their funds cheaply at an average cost as low as 2%, whereas the microfinance industry gets its funding from banks at interest rates as high as 25% and they often hold bad-debt provisions of 20% for loans issued.

It is understood that the established banks have voiced concern to the authorities that some practices contribute towards making this market unsustainable in the longer term. The banks say obstacles to discourage some industry players from taking on unsustainable risks are inadequate.

Minister of Finance Pravin Gordhan last month expressed concern that aggressive unsecured lending was putting pressure on low-income households, fuelling fierce debate over whether such lending stimulates the economy by making credit more widely available, or is simply callous about profiteering off unsophisticated credit consumers.

Data from the Finmark Trust shows that the three main reasons South Africans borrowed in 2011 was to buy food (26%), for personal use (20%) and for transport (16%). This contrasts with national credit regulator's research, which showed that 27% of loans extended by credit providers were for debt consolidation and 23% for household renovations.

One industry player, who asked not to be identified, pointed out weaknesses in the present system.

When in debt review, all credit providers are treated equally. This means a credit provider who is the fifth to provide a loan is treated the same as the one who gave the first loan.

"Major banks are in favour of a last-in-first-out approach, but aggressive lenders are not happy with this," said the industry source.

When in debt counselling, all a client's credit agreements are treated equally and the counsellor does not have to negotiate with each lender.

The argument for a last-in-first-out approach is that the later lenders are more reckless in lending to heavily indebted clients and should therefore be forced to take earlier haircuts.

Hennie Ferreira, chief executive of MicroFinance South Africa, said short-term loans, by their nature, were generally last in.

"Regulators must enforce. Reckless lenders must be named and blamed. But you cannot use the payment system to regulate credit providers," he said.

Preference to microlenders
Another reform up for debate is the debit order system Naedo – non-authenticated early debit order – used by most financial institutions, which favours smaller debit orders (amounts equal to or less than R5 000) that come off the balance first and therefore give preference to microlenders. Payroll deductions can also be made, for instance, by a retail outlet supplying clothes before the borrower has paid his or her home loan. "The consumer is disempowered by this," the banking source said.

But, Ferreira said, before the introduction of these payment systems, banks used to have a preferential debit order to recoup monies owed to them first.

"The new system has simply levelled the playing field," he said.

The debit order system was designed to entice other lenders into the formal banking system. If unsecured loans were put last, that credit market would dry up, Ferreira said.

Larger amounts are usually also backed by assets, so those lenders were a lower risk, said Mark Seymour, chairperson of the Credit Providers' Association.

Ferreira said the cards had been stacked against microlenders all along: "Banks are being forced to compete in this space and are now complaining about rules made to level the playing field."

He said the rates and charges for short-term and unsecured loans, which affect microlenders, were determined in 2005 and needed to be reviewed by the national credit regulator.

The regulator's research on increased unsecured lending, released in August, shows that unsecured loans account for 9% of the gross debtors book and have grown by more than 49% since last year and tripled to R121-billion since the National Credit Act came into effect.

Low base
But big players claim they are not diving in with reckless abandon.

Leon Barnard, head of inclusive banking at Standard Bank, said its unsecured loan book for those earning less than R8 000 a month was only R3.4-bllion, up from R761-million at June 2011, but only a small fraction of its total personal banking and business assets of R420-billion.

"Growth in this market comes off a low base because this was not a focus of the bank in the past," he said.

Unsecured lending in the middle market (monthly income from R8 000 to R25 000 a month) has experienced a 35% growth over the past year and stands at R14.3-billion.

Sustainability remains a priority. "Unlike other lenders who may be extending the size and terms of these unsecured loans, Standard Bank is lending mainly to current customers, which influences the risk taken. Sustainable business is still the priority," Barnard said.

Ingrid Johnson, group managing executive of retail and business banking at Nedbank, said personal loans made up less than 4% of the group's advances and the bank remained cautious.

"We are acutely aware that the high industry growth rates are masking underlying levels of distress. Distressed clients can make use of the debt-consolidation mechanisms offered by many players, including larger size loans and a longer duration," she said.

"Nedbank has not changed its loan size and tenor maximums since 2009."

A lesson too late for many

<em>Mail & Guardian</em> readers surveyed online about debt levels reported widely varying experiences, but most found their levels overwhelming. One woman, who has nine credit agreements, owes almost R250&nbsp;000 to lenders and earns R8&nbsp;000 a month. The main reasons for her debt were electricity, school fees, petrol, groceries and medical expenses over and above medical aid. "I can't sleep at night because of stress … I haven't gone into debt review. I'm praying that God intervenes … The thing is, our needs as households are unlimited; you can't satisfy them."

Respondents had mixed feelings about whether their ability to repay debt was properly assessed. But Hennie Ferreira, chief executive of MicroFinance South Africa, said it was hard to protect consumers from themselves because often they did not fully disclose their living expenses. And "when consumers don't disclose, bank statements don't tell you everything", he said. "But you won't find hardcore reckless lending in high-street financial institutions."

It all caught up with a male respondent after eight credit ­agreements and an accumulated debt of R130&nbsp;000.

"It was easy to obtain credit at the time, year 2008. The lenders … would approach me with offers for credit cards or overdrafts," he said.

He had soon maxed out the credit card, had a loan, an overdraft and clothing accounts and was living from one salary to the next.

"The banks and lenders assessed my ability to pay off debt ­accurately, but I feel that the assessment is limited to the individual getting the loan or account. It does not continue to educating the individual on how to manage the debt afterward." – Lisa Steyn

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