Bloomberg News

S. African Banks Test Debt Plan as Lenders Face Loan Haircut

May 10, 2012

A bank employee checks an identity document via mobile phone as he sells accounts on the street in Khayelitsha, the poorest and largest township outside Cape Town, South Africa. Photographer: Per-Anders Pettersson/Getty Images

A bank employee checks an identity document via mobile phone as he sells accounts on the street in Khayelitsha, the poorest and largest township outside Cape Town, South Africa. Photographer: Per-Anders Pettersson/Getty Images

South Africa’s biggest lenders agreed with the government on a trial program that would cut interest on 14 billion rand ($1.8 billion) of loans to some of their most indebted customers, the head of the banks’ lobby group said.

Loans to people in debt-counseling programs will be rescheduled over five years, Cas Coovadia, head of the Banking Association of South Africa, said in an interview at the World Economic Forum on Africa in Addis Ababa, Ethiopia. South Africa’s credit and antitrust regulators are both “on board” with the pilot project, he said.

“We may be able to restructure the debts of 70 percent” of those South African consumer-bank customers who are in arrears and in credit counseling, Coovadia said. “Haircuts will have to be taken.”

South Africa’s four largest banks, including Barclays Plc (BARC)’s Absa Group Ltd. and Nedbank Group Ltd. (NED), have seen bad-debt levels stay elevated even as the nation’s central bank has held interest rates steady since the end of 2010, limiting the burden on borrowers. With policy makers expected to raise rates this year to restrain inflation, loan books may sour further.

“The first step to restructure will be to reduce interest rates charged to the repurchase rate over five years,” Coovadia said. “If people still can’t do that, then the interest rate drops to zero.”

All South African banks and some retailers will be ready to test the program by the end of June, according to Coovadia.

Looser Criteria

The total number of consumers with impaired credit records increased by 100,000 to 8.93 million in the fourth quarter of last year, the National Credit Regulator said in March.

The lenders have been targeting low-income people to boost sales. In 2009, Standard Bank Group Ltd. said it would loosen loan criteria for mortgages and credit cards.

Some 23 percent of people in South Africa live below the poverty line, according to the World Bank, and central bank statistics show the nation’s savings as a percentage of household income was zero in the third quarter of last year.

“I am aware of the National Credit Act changes being considered and to be piloted,” said Louis von Zeuner, deputy chief executive officer of Absa (ASA), South Africa’s largest consumer bank. Absa reported a credit loss ratio of 1.01 percent in 2011. That’s almost double the figure reported in 2007, before the financial crisis began.

“That banks are looking at the serious problem of high indebtedness is to be welcomed,” said Luke Doig, an economist at Credit Guarantee Insurance Corp. of Africa Ltd., by telephone from Johannesburg. “The more people that can carry on economically without impaired credit records, the better.”

Rate Risk

Nedbank, which posted a 26 percent increase in first quarter profit, failed to reduce impaired debt as much as some analysts had anticipated.

The “industry would be looking to pilot a voluntary debt mediation” that “should result in faster resolution with less legal costs,” Nedbank Chief Executive Officer Mike Brown said in an e-mailed response to questions.

Four out of six economists surveyed by Bloomberg estimate that interest rates will rise by 50 basis points in the fourth quarter of this year.

“If interest rates go up, the non-performing loans are going to go up,” Sizwe Nxasana, head of South Africa’s second- largest financial services company, FirstRand Ltd. (FSR) said in a Feb. 28 interview. “We’re focusing on better customers, better pricing and margins.”

While economic growth appears to be sustainable and moderate, there is little or no room to lower rates given South African inflation is at the top end of the target range, central bank Governor Gill Marcus said on May 7. The cost of a liter of gasoline has risen every month since February.

To contact the reporter on this story: Renee Bonorchis in Johannesburg at rbonorchis@bloomberg.net

To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus