Credit act likely to stir up litigation

March 28, 2007

By Tom Robbins

Cape Town – JD Group expected a slew of litigation before credit provision precedents were established under the National Credit Act, the furniture retailer said yesterday.

The act, which kicks in on June 1, aims to give consumers at the bottom end of the market greater access to credit, while trying to offer them greater protection from reckless lending.

JD Group chief operating officer Johan Kok said that while the act was well intentioned, he expected numerous court cases to arise out of it.

Kok said litigation was likely to include court cases that would define exactly what constituted reckless lending.

Under the act, retailers must judge whether a loan to a customer is reckless.

If courts consider it reckless they may set aside all or part of a customer’s obligations to a credit retailer. Magistrates will be called on to make rulings on reckless lending, but parties unhappy with rulings may appeal them in higher courts.

Kok expected credit retailers and the National Credit Regulator to go to court before case law was eventually established. Defining what powers the regulator had to suspend contracts considered reckless could also go to court, he said.

Ian Wood, financial services executive for Edgars Consolidated Stores (Edcon), agreed that litigation was likely but said there were benefits as well as concerns regarding the act.

Credit retailers would have more leeway to price risk into loans, which would give Edcon access to a new band of lower-market consumers. This would also meet the government’s objective of increasing consumer access to credit.

Under the act, clothing retailers will be able to charge up to 28.7 percent on most of the credit they provide, whereas previously this was capped at the usury rate of 20 percent

Wood said the credit regulator was yet to set up the National Loans Register, which would check what other credit a loan applicant had when companies such as Edcon did an affordability test.

CPIX won’t hold off rate hounds

March 28, 2007

By I-Net Bridge and Philip Devine

Johannesburg – South Africa’s Consumer inflation excluding interest on mortgage bonds (CPIX) inflation rate rose by 4.9 percent year-on-year in February from a 5.3 percent rise in January, Statistics South Africa said on Wednesday.

The data, which came in below forecasts, showed that the all-items consumer price index (CPI) increased by an annual rate of 5.7 percent in February compared to January’s 6.0 percent.

CPIX fell by 0.1 percent on a monthly basis and headline CPI declined by 0.1 percent.

Economists interviewed by I-Net Bridge were fairly cautious in their reactions, stating that the good data may not have enough impact to keep interest rates in check.

George Glynos, market analyst at ETM, said the CPIX was ‘a nice and soft figure’, adding that the news should be positive for the bond market.

Eskom Treasury economist Kabelo Masike said that data was a pleasant surprise but that pressures from the rand’s volatility during February and early March would likely feed through to CPI data.

Brait economist Colen Garrow said that while the figures were good, there would probably be no change in interest rates.

“But there will still be pressures from petrol and food inflation in the coming months,” he said.

This sentiment was echoed by Investec’s Annabel Bishop who said that the possibility of a 50 basis point interest rate hike in April has ‘increased substantially’.

“We will wait for the release of the February PPI inflation and money supply and credit figures before making an official change in our interest rate view – although it is currently highly likely we will make the change, from a flat interest rate outlook this year to a 50 basis point hike at the April MPC meeting,” she said. – I-Net Bridge and Philip Devine

Interest rates may have peaked

March 29, 2007

By Evan Pickworth

Johannesburg – While there are some risks to the upside for South Africa’s inflation outlook in the short term, a moderation toward the end of the year is still on the cards, meaning that interest rates may already have peaked, economists said.

Forecasts by Standard Bank and Vunani Securities closely matched Wednesday’s surprise moderation in CPIX inflation, with both expecting CPIX at 5.0 percent from 5.3 percent in January and from a consensus expectation of 5.2 percent.

CPIX for February was reported up 4.9 percent by Statistics South Africa.

Both of these groups pointed out that interest rates may have peaked in the current cycle and that another rate hike on April 12 is on the whole unlikely.

Standard Bank economist Elna Moolman said: “Retail inflation dipped modestly in February, exactly in line with our expectations, though below most other analysts’ forecasts. This moderation, however, is likely to be temporary, and does not alter our forecast that sharp increases in inflation in the next two months will take targeted inflation to the inflation target ceiling.

“But a (b)reaching of this ceiling should be temporary, and retail inflation is expected to moderate noticeably towards the end of the year.”

She added that hawkish remarks made by the governor of the Reserve Bank this week underscore the rising risk of further monetary policy tightening, but said as a central outlook “Standard Bank still holds the view that the peak in interest rates is with us already”.

“The largest risk to this benign outlook is posed by rising food prices,” said Moolman.
Vunani Securities economist Johan Rossouw said the fact that inflation numbers for February are generally more benign than expected, particularly in case of food prices, is “heartening”. However, he noted a few riders to the short-term view.

“Unfortunately, maize prices continued to surge, which will exert additional upward pressure on inflation. Hopefully, maize prices should start declining as harvesting commences, though. Moreover, heavy marketing by red meat producers are expected to drive meat prices down in the run-up to winter, although that implies increased risk of price increases once it starts raining next summer,” he explained.

Rossouw said the single biggest risk in the short run remains the international oil price.

“A 24 cents per litre increase in the price of petrol in March to be followed by a further sizable increase around 70 cents per litre in April does not bode well for inflation over the next few months. If the rand weakens on top of even higher oil prices the implication for inflation could be bleak! Still, we remain confident that prevailing conditions do not necessarily justify higher interest rates,” he states.

Rossouw pointed out that the Reserve Bank’s inflation targeting framework specifically highlights adverse agricultural conditions and oil price shocks as two mitigating factors which should not necessarily culminate in policy tightening.

“Moreover, the Bank should be looking forward rather than focus on short-term prospects for inflation. We still believe an unchanged repo rate decision at the April MPC meeting will be prudent,” he said. – I-Net Bridge

Innovation is defferentiator in credit card competition

Consumers in the past were grateful if they received credit. How things have changed!

Historical news: Daily news

Alan Pollard

The shift towards consumerism is accelerating with significant implications in many of the markets in which we operate. Fundamentally, our view is that consumerism involves a shift in power from institutions towards consumers.

The rapid transformation of the credit card industry – first with the severing of the traditional tie between bank accounts and credit cards and second, with the emergence of credit as a true commodity in the credit card industry – illustrates this so well.

Consumers in the past were grateful if they received credit – it was seen as a right granted to a special few by a bank and hence banks held power over individuals. The value proposition was the availability of credit. How things have changed!

The DiscoveryCard, which has now in excess of 400,000 cards in circulation, is a stand-alone card using the Discovery brand and offering a value proposition outside of the banking network almost entirely. The movement of Virgin Money into the market is predicated on the same issue; in fact, its explicit mission is to be anti-bank and to lambaste banks about their wastage of consumer fees.

We stood alone when we first launched the card, but we now find collaborating with companies as diverse as Woolworths and Virgin to offer consumers credit cards that deliver value and meet their needs. The result is that competition is fierce and innovation is becoming the differentiator

The implication now is quite clear to us that the competition in the industry is not going to be about the availability of credit, but the value proposition of the card.

While the average number of cards in a person’s wallet has increased over the last five years, the value to an individual of having multiple cards will diminish in an environment where credit is a commodity.

The cards that prevail as a single card of choice will be those that consumers judge to be the most valuable in providing access to new services and actively lowering the cost of living – with or without card fees. That is where the focus needs to be and is a challenge which we take on readily on behalf of our clients.

Alan Pollard is the CEO of Discovery Vitality.

On credit card bubbles and crashes

There is still plenty of scope for growth in the SA credit card market; but will this have a happy outcome?

Erika van der Merwe
28 August 2006 Not so long ago, South Korean consumers and financial institutions picked the fruit of aggressive and indiscriminate issuing of credit cards. By late 2002 the consumer boom triggered by credit based spending had culminated in widespread credit card defaults; bail-out packages for credit card firms ensued and policy makers battled for years to crank up consumer demand again.

With the generous availability of credit cards from South African banks, retailers, airlines and others, it is only natural to wonder whether we are headed in a similar direction.

Credit card debt has been expanding at rates of more than 40% so far this year, well in excess of other forms of credit.

But analysts appear calm about the impact this will have on banks’ lending books and consumers’ financial position.

As long as interest rates rise only modestly and individuals’ income levels continue to grow, the debt-servicing burden is likely to remain manageable. Besides, penetration of credit card use in South Africa is still fairly low, with most users up to now having used these as transaction tools rather than an easy form of debt.

Moreover, unlike the South Korean situation at the time of the aggressive growth in the availability of credit cards, which began in 1998, South African regulations demand rigorous financial checks.

Plastic spending

Nedbank chief economist Dennis Dykes says the rate of credit card growth, which reached 40,2% (year-on-year) in June, is the highest we have seen since 1995-96.

He ascribes the surge in credit card use in 1995 to the first wave of black economic empowerment (BEE), when blacks entered public service and followed the natural path of taking on credit to finance a salaried lifestyle

A second wave followed in 2004, as the private sector embraced BEE. At the time interest rates started declining, which accelerated the appetite for credit.

The question is, Dykes says, whether the new middle class is over-extending into credit, or whether this is part of a natural, structural process, as living standards improve.

Provided there is some slackening in credit card debt growth over the next year or so, and assuming that interest rates do not spike, the situation should settle down, Dykes argues.

Standard Bank senior economist Elna Moolman agrees, saying that, as long as nominal income levels continue to pick up, these will be able to absorb the effects of moderate interest rate increases.

She adds that banks’ non-performing loans are picking up, but that these are still at historically low levels and not a concern to banks.

For now, consumers are able to service their debt – in whatever form – fairly comfortably.

Although debt-to-income levels were at record-highs of 68,2% in the first quarter of this year, the debt-servicing burden is modest: the South African Reserve Bank reported in its recent annual report that the debt repayment to income ration reached 7% in the first half of this year. This compares rather favourably with many other countries’ debt-servicing burden (see graph).

Debt repayment-to-income ratio 

Source: Standard Bank Economic Unit

From a banking perspective, the surge in credit card debt is part of a clearly considered strategy, rather than a haphazard extension of credit, says Coronation Fund Managers’ financial services specialist Neville Chester.

South Africa had been an anomaly in that credit cards generally were used as a transactional tool rather than a means to take on uncollateralised debt, Chester says.

Credit cards for all

Financial institutions are now extending credit cards to a lower-income spectrum of users, who are more likely to accumulate debt in this manner.

Chester says this is likely to boost bad debt levels, but that institutions are building fatter margins into this debt and are therefore providing for the risk.

As far as the risk of default is concerned, his impression is that the financial institutions are more concerned about the sustainability of consumers’ employment levels than with where interest rates are headed.

Part of the motivation for banks to make credit cards more freely available is that it helps them to understand the credit behaviour of a new, untapped market segment.

Compared with most other forms of debt, credit card debt is short term in nature and tends to involve lower amounts. This is therefore a less-risky way of testing the debt waters, one analyst says.

Part of a strategy

From both a business and a regulatory point of view, it would be irrational for banks to make bad lending decisions. Chris Sweeney, managing executive of Absa Card, says that the National Credit Act ensures a further degree of reasonableness in banks’ checks on the affordability of loans.

Sweeney is confident that this pace of credit card debt growth will continue.

The healthy macro-economic environment and continued appetite for banking products by the emerging-black middle class will support the growth of this market, he says.

What is more, credit cards are convenient, accessible, flexible and secure – appealing characteristics which coincide with the demand for banking products, according to Sweeney.

Compared with most mature economies where consumers have at least one credit card each, South Africa has 7m cards in issue – for a population of nearly 45m. Those South Koreans who are economically active now have about three-and-a-half credit cards each.

This story first appeared in Moneyweb Business in the Citizen

All about your credit profile – Dikatso Mametse

How to keep a clean credit record.

 Historical news: Daily news

Dikatso Mametse
30 August 2005

You are finally getting back on track with your finances. You are slowly paying back your debt, and you’ve got a good stable job and decide, perhaps it is time you bought a car, or a house for that matter.

You approach the bank, and sadly they turn you away. All they are prepared to tell you is that there is an ‘issue’ with your credit report, or that you didn’t score high enough.

The best thing to do under these circumstances is to contact the credit bureau (This could be one of two credit bureaus in South Africa – Experian or Trans Union ITC ) the source of your bank’s credit report.

Most lenders will look at your personal credit report and use it to decide the risk involved in lending you money.

Different companies take different factors into account when deciding whether or not to give you credit.

There may be a couple of reasons why your application for credit was declined.
Perhaps it is in the way you pay your accounts, or the ‘defaults’ that may have been listed against you because you didn’t pay your debts, or judgments that have been granted through a court because you haven’t paid your debts.

Nobody can remove a negative credit report that is accurate, so try avoiding businesses that claim to repair your credit record. A negative credit report will expire in time. Defaults stay on your record for three years while judgments stay for five years. The decent thing to do is to settle with those whom you let down to clear your name.

But in the meantime, running your finances carefully will improve your credit report.

Credit profiles are a history of an individual’s or business’ credit behaviour and help credit grantors make decisions whether to grant you credit or review existing credit limits.

How to keep a clean credit record

• Never buy on credit without knowing if you can afford the repayments. Ask the credit manager to show you exactly how much you will have to repay each month and for how long.
• If you are asking for a large loan, ask what happens to payments if interest rates rise.
• You must pay your accounts on time. Whether it’s store cards, telephone bills, and electricity bills – make sure they are paid up on time.
• If you have a really bad month or lose your job and can’t make your payments talk to your creditors. They might make a plan to freeze your accounts for a while or reduce the payments.
• Never ignore a letter of demand for payment. Never ignore a summons to court for non-payment, if ignored, this could reflect badly on your credit profile.
• If your ID book is stolen, report it to the police and send your case number and a copy of your police affidavit to one of the main credit bureaus. They will make a note in your file to stop fraudsters using your ID to get credit.

It’s a good idea to get a copy of your credit profile.

You can order your credit report or profile from your two main credit bureaus, Experian, and Trans Union ITC by contacting them. They will charge you between R25 and R35 for a copy of your credit profile or report.

Eighteen million credit active consumers are on the credit bureau’s records. About two million people cannot spend money because they have been blacklisted.

In theory, you should never be suddenly refused credit without knowing why. That’s because lenders are supposed to give consumers 28 days’ notice if they’re going to send information about a default to a credit bureau so you’ve got a chance to sort things out.

The impact of inflation, credit

And how food has turned into a much bigger rogue.

Cees Bruggemans, Chief Economist FNB
20 March 2007
Last year CPIX inflation was projected to rise above 6% by Easter 2007, relapsing once again thereafter.

In subsequent months the CPIX outlook steadily improved as oil dropped and the rand firmed, with the 2007 CPIX peak coming closer to 5,5%.

Events, however, didn’t stand still. Today we are again expecting to go over 6% in April 2007. Even so, we continue projecting a relapse thereafter towards 5% in 2007 and below 5% in 2008. But it will all depend on events to come. This will provide a major input into the Reserve Bank’s reaction.

Meanwhile, the credit cycle peaked in 2006 and is now trending down. This credit slowing will be assisted in various ways. By securitising more of their outstanding loan books, the banking industry will show less reported credit growth this year, but the Bank will look through this to the underlying situation.

Much more important are a few other things that happened recently. The banks have signed a code of conduct aimed at issuing credit more responsibly. This basically brings forward the legal requirements effective from mid-year.

But simultaneously, the government has lifted the maximum usury rate ceiling by 3%. Whereas most bank borrowers encountered an increase of 2% last year, the effect of which is still coursing through the economy, the usury ceiling was left unchanged. Those debtors at maximum usury rates did not experience a rate rise at all last year. This has now been changed. Such consumers will mostly experience a 3% rate increase shortly. That should have a further dampening effect on borrowing in the coming year.

Also, it isn’t as if the economy hasn’t been changing. Passenger car sales growth has slowed and instalment debt with it. House price gains have been steadily easing, and some more cooling off is expected, also translating into slower credit growth. Residential building activity is expected to turn negative this year, though not as bad as in the US. These influences are bound to show up at retail level as well.

Rising CPIX inflation will erode real purchasing power. This should ensure high household spending growth coming into line with income growth this year.

What else do we potentially face this year?

The labour market keeps giving the impression of serene stability. Despite pockets of remarkable wage inflation (skilled engineers, talented youngsters with the right profile), the overall labour market is yet to show much evidence of overheating. When adjusting nominal wage and salary increases for productivity improvement, unit labour cost is only progressing at 3-5%.

That’s the main locomotive for future domestic inflation, yet very much central to the Bank’s 3-6% CPIX target.

But there are a few rogues out there which may push us off target such as oil, food and the rand.

Oil at $60 isn’t behaving too badly. That could change if someone decided to take out Iranian nuclear facilities, but until this actually happens, global oil demand and supply suggests continuing benign conditions.

Food has turned into a much bigger rogue. Global maize prices have risen dramatically due to bad droughts and ethanol deflection. This has now been compounded by a severe local drought, which has reduced crop estimates to 6,5m tons. Not a total disaster, but putting upward pressure on maize prices. This, and more drought effects, could push other food prices higher, though meat prices could fall (more cattle being sent to market).

Higher food costs would especially affect the poor, hitting their meagre purchasing power, and probably reducing their confidence, something already hinted at late last year.

In addition, the rand has weakened by 3% this month due to global financial volatility, reinforcing external price pressures.

Will the Bank make its contribution to our woes in 2007 by raising interest rates once again?

At least a rand weakening, if sustained, provides higher income to exporters. In an economy already performing at maximum potential, one wouldn’t want too much additional stimulus for the economy.

But that argument hardly prevails when a quarter to a third of the maize crop burns off the land. Farm incomes will shrink, despite good prices. The poor will recoil from the higher food prices.

Adding insult to injury by raising interest rates if crop failure is at the centre of the CPIX jump doesn’t come naturally. Rand stimuli are something else, as are any secondary effects, raising inflation expectations.

Inflation expectation changes and economy stimuli, if any, need to be weighed against changing economic circumstances, such as sector slowing, demand loss and cooling credit growth, and their impact on expectations and inflation behaviour down the road.

Not a straightforward proposition, especially as CPIX inflation on current news is still expected to fall back into the 3-6% target range later this year and next.

On balance, the interest rate pause could continue, if no new events shocking inflation higher materialise.    

Credit splurge loses some of its edge

But, alongside rand vulnerability, the consumer’s appetite for credit will keep the Reserve Bank wary.

Erika van der Merwe
01 March 2007
Growth in bank credit extended to the private sector may have softened slightly in January, but the pace remains vigorous and persists at a time when the rand appears vulnerable once more. It may be too early to conclude that the Reserve Bank will be resting in its laurels from here onwards.

According to numbers released by the Bank on Thursday morning, private sector credit expanded by 24,8% (year-on-year) in January, below the 25,9% reported for December.

Adenaan Hardien, economist at Cadiz African Harvest Asset Management, says the slowing rate of expansion partly reflects the last year’s high credit base and the trend by financing institutions towards the use of securitisation to raise capital.

Securitisation deals worth about R12,6bn have been concluded over the past six month, which were related mainly to vehicle and mortgage credit, says Stanlib economist Kevin Lings. This source of financing is not reflected in the credit numbers.

It may be that higher interest rates are starting to bite into consumers’ appetite for credit, but a closer look at the numbers suggest that there has been not a flutter in the expansion rate of asset backed credit.

Asset backed finance – the total of leasing finance, instalment sales and mortgage advances – grew by 26% in January, from 25,8% in December.

Mortgage advances, the largest single item of credit, continues to balloon at 30%. Instalment sales lifted by 12,7% (12,4% in December) and leasing finance by 17,8% (17,6%).

A growing number of economists are pointing out that corporate demand for credit is increasingly reflected in these numbers, which ought to be comforting: unlike consumers, companies use credit largely to finance productive expansion.

The Nedbank economic unit says some slowing in credit growth is likely in the months ahead, as household demand for credit gradually softens in the face of the tougher interest rate environment and given the record-high household debt levels.

But until we have evidence of this slowing, it may be premature to rule out further policy tightening by the Bank. The vast January trade deficit, reported on Wednesday, is a reminder that the rand is vulnerable. Events such as the global financial market jitters that erupted this week potentially could trigger sharp downward movements in currencies as vulnerable as ours, thereby stoking inflation fears.

A nation of credit? Geoff Candy: Moneyweb

26 March 2007 23:02

MONEYWEB: Geoff Candy has had a look at the way we are splurging on credit in South Africa.

GEOFF CANDY: The level of credit extension in the country is at record highs and some, including Reserve Bank governor Tito Mboweni, have raised their eyebrows. Mboweni even went so far as to say the level of bank lending boggles the mind. But the lenders all maintain that, while there is an element of recklessness in the current situation, they are not the ones responsible for it. Indeed, most in the industry maintain that while credit is at an all-time high, it is not at reckless levels – and they have all learnt their respective lessons from the likes of Saambou and Unifer. They also point to the recently promulgated National Credit Act as proof that this time things will be different. As Eric Levenstein, a director at Werksmans Attorneys, explains:

ERIC LEVENSTEIN: If you go back in time, the retail industry, particularly the retail furniture industry, you would have an individual who would buy, let’s say, a lounge suite, and ends up unable to pay the instalments. After repossession charges, legal charges, interest costs, etc, the person might end up paying six or seven times the original amount of that item of furniture. So, you know, that’s been heavily reported on in the press, and that’s really what the Act is looking to overcome. And then the other element is reckless credit. If you don’t properly assess your consumer when you give credit, the credit provider might very well have that credit agreement set aside as being reckless. And if it’s reckless, the court may very well suspend the forcing effect of the credit agreement, or set aside all or part of the consumer’s obligations in terms of the credit agreement, which obviously has serious consequences for the credit provider.

GEOFF CANDY: Johan Kok, chief operating officer at furniture retailer, JD Group, agrees that the new Act is ultimately a good thing.

JOHAN KOK: The new National Credit Act actually recognises that the current legislation that is in place right now – being essentially the Credit Agreements Act and the Usury Act – has served its purpose, it has gone way past its sell-by-date and the market has actually moved far beyond, from an evolution point of view, those two pieces of legislation having any further use.

GEOFF CANDY: The banks, too, have seen the legislation in a positive light, because it provides them with the moral licence needed to lend into what was previously a murky unregulated environment. Some sceptics believe, however, that the more stringent regulations coming into effect in June, when the NCA goes live, are part of the problem. They maintain that many lenders are going hell for leather to get customers onto their books before the new legislation comes into effect. Gabriel Davo of the National Credit Regulator, a body created by the new Act, says that when an Act comes into effect, there will be fallout.

GABRIEL DAVO: Credit growth has been huge in the last months – maybe even up to the last year. There is going to be some fallout, there are going to be some consumers who are going to get burnt. There is no indication that we have seen that it is at the level of a market risk, at the level of major institutions at all being to a significant level affected. But the concern that we see is when we see individual clients that became over-extended, or who may well have been highly-extended already, and are now even more highly extended. And we expect that when the debt-counselling mechanisms become effective on 1 June, we are going to see those cases in front of the debt counsellors.

GEOFF CANDY: One of the controversial aspects of the Act is the caps it imposes on the level of interest that can be levied by lenders. But this was intentional, as Davo explains.

GABRIEL DAVO: In nearly all the categories, the new caps were actually slightly higher than what the old usury cap was. And that was a clear policy intent. The intention was to enable large mainstream providers to move down-market, to provide credit at lower income levels than what they have had done previously, in order to increase access to finance.

GEOFF CANDY: The Act also makes provision for debt counselling, whereby someone who feels they have too many commitments can admit that they have got in over their heads, or that they have been lent to recklessly, and the debt counsellor will take on the case and look at what can be done to sort out the problem. There could, however, be unintended consequences to this, as Levenstein explains.

ERIC LEVENSTEIN: The one interesting one is debt review, [which] means a consumer goes to a magistrate and basically says, look, I can’t pay my debts as and when they fall due – and that would result in a debt restructuring. But in fact, if you look at the law of insolvency, the very admission that they cannot pay their debts is an act of insolvency, and if the credit provider wanted to, he could apply for that consumer’s insolvency. So that hasn’t been catered for or dealt with at all in the Insolvency Act or in the National Credit Act. So time will tell whether or not credit providers take advantage of such an admission.

GEOFF CANDY: The other main concern is around what is exactly constitutes reckless lending? Kok gave Moneyweb the example of a Barnetts client who earns only R1300 a month as a domestic worker, but pays an instalment of R450 to Barnetts. The woman’s employer complained to Barnetts that this was indeed ridiculous and reckless, only to be told that this was in fact the fifth such contract this woman had had with the furniture store, and all had been impeccably paid.

JOHAN KOK: When the chief executive phoned her and said, “Your missus has got a problem with you having an account with us,” she said, “What is it to my missus?” And he asked her, “How do you afford it?” She said: “Meneer, I pay the furniture, my husband buys the groceries, and my two sons pay for the transport money for the family. And that is how we share it and that’s why I can pay R450 on my salary – because I have no other expenses that’s covered.”

GEOFF CANDY: But as Kok explains, while there have been questions asked about such lending practices, such a business model would be unsustainable.

JOHAN KOK: Any lender who today entertains reckless lending, particularly in the broad mass middle-consumer market, mostly unbanked previously, will see his boots in no time flat. The path is littered with the corpses of those who entertained that kind of practice.

GEOFF CANDY: There are still many uncertainties surrounding the new Act, but if it succeeds in its aim of insuring more responsible lending, then we all start to benefit. This is Geoff Candy for the Moneyweb Power Hour.

ABOUT THE INTERVIEWER

Alec Hogg - Alec Hogg is a writer and broadcaster. He founded Moneyweb and is its editor-in-chief.
Email: alec@moneyweb.co.za

Credit boom is ’stretching’ global banking systems – Fitch

South Africa is in the highest-risk category.

John Glover, Bloomberg
26 March 2007
The highest rate of lending since the eve of the Asian crisis in 1997 is “stretching” banking systems worldwide, according to Fitch Ratings.

Credit growth is running at an 11% pace, making banking systems vulnerable to an increase in bad debts, Fitch said in a report on Thursday. The weakness is more pronounced in developed countries, with Australia, Canada and Iran joining Iceland, Russia and Azerbaijan in the highest-risk category.

“We’re finding conditions that in the past have been leading indicators of problems for the banking system,” Richard Fox, an analyst at Fitch in London, said. “There’s clearly a global credit boom taking place – the longer it goes on the more stretched banking systems get.”

Banking system stress is signalled when rapid lending growth is accompanied by “strong” increases in equity or property prices, or by the strength of the real exchange rate, Fitch said. Seventy percent of developed countries show “moderate” or “high” vulnerability to stress, compared with emerging nations where “only half” are potentially vulnerable, Fitch said.

Iceland, where private sector credit rose by more than 63% of gross domestic product (GDP) last year, remains in the highest-risk category, along with South Africa, Russia and Azerbaijan. The four have been joined by Australia, Canada and

Iran, Fitch said in its latest “Bank Systemic Risk” report.

Systemic risk

Fitch also measures the strength of countries’ banking systems to gauge their overall vulnerability. Strong banking systems, which are found in “almost all” developed countries, are better able to deal with adverse shocks, Fitch said.

“Developed countries in the high-risk categories are starting from a strong point,” said Fox. “We’re less concerned about them than about Russia, Kazakhstan and Azerbaijan, say.”

Nine of the ten fastest rates of growth in credit are to be found in central and eastern Europe and in the Confederation of Independent States, where banking systems are typically “weak” and less able to withstand stress, Fitch said.

The pace of credit growth in some countries where the ratio between lending and GDP is already high, such as Kazakhstan, the Baltic nations and Ukraine, is so fast “as to warrant special concern,” Fitch said.

The quality of China’s banking system has improved because of strengthened capitalisation, a smaller number of non-performing loans and a strong economy. The improvement is good news for everyone, Fox said.

“The bigger the banking system and the weaker it is, the more we’re concerned about it,” he said.