Credit watchdog on the prowl ahead of Xmas

2011-12-17 10:29

The country’s credit watchdog is keeping a close eye on the increasingly lucrative unsecured credit market.

Big lenders are fiercely scrambling for this market, which is dominated by Capitec Bank and African Bank.

In the build-up to the festive season, big banks and microlenders stepped up their advertising campaigns to tap into the growing number of cash-hungry customers who are looking to fund their spending.

The Consumer Credit Market Report, released this week by the National Credit Regulator, shows unsecured credit extended to consumers rose 12% to R21.21 billion in the third quarter of this year from R18.95 billion in the second quarter.

At the end of September, unsecured credit accounted for about 8% (R101 billion) of the R1.27 trillion owed by South African borrowers.

In the second quarter of 2008, unsecured credit made up about 4% of total consumer debt, meaning that it has doubled since then.

The bulk of the outstanding debt owed by South Africans is still overwhelmingly high in home loans, which account for about 62% (R786 billion) of total consumer debt.

The statistics manager at the regulator, Rajen Devpruth, said since growth had slowed in the home loans market, lenders were targeting the unsecured loans space, where they can make a quick buck in the least amount of time compared with mortgage loans, which generated lower returns over a long period of time.

“There is a scramble for this market because it is lucrative, but we have not seen any indication of a bubble.

“We are watching the market closely for any signs of irresponsible lending.

“We recently met with the lenders and they gave us an assurance that they are playing according to the rules,” said Devpruth.

According to him, the National Credit Act, which was introduced in 2007 to stamp out reckless lending, has opened up the unsecured lending space, causing a massive growth and even bucking the recession.

Before the act, credit providers were allowed to provide cash loans of up to R10 000 over a 36-month period, but nowadays they are permitted to lend up to R180 000, which can be repaid over 72 months.

The end result is that money lenders can dish out bigger loans than before and charge higher interest than they are able to charge on home loans.

When charging home buyers, banks usually use prime rates as a guide.

The act permits lenders to charge interest rates of up 32% on unsecured cash loans, higher than the prime rate, which is currently sitting at 9%.

Devpruth said there was a big appetite for unsecured loans and many consumers were using them to buy second-hand cars and furniture as well as to do extensions on their houses.

Others were using unsecured loans to raise deposits to buy homes.

Gift Manyanga, the chief executive of EasyPlan, a subsidiary of First National Bank that provides loans to low-income customers, agreed that the unsecured loans market was lucrative, but added that it was also risky.

“The unsecured market is lucrative, but you need to be very careful because it comes with high bad debts.

“Depending on how good your (debt) collection is, about 15% to 30% will default at any given time. You can have your fingers burnt if you are not careful,” said Manyanga.

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