Unsecured lending in historical context Stuart Theobald, CFA Africa Unsecured Lending Summit 22 August 2013, Johannesburg
Unsecured lending in historical context
Stuart Theobald, CFA
Africa Unsecured Lending Summit
22 August 2013, Johannesburg
• The early history of unsecured lending
• The first microloan crisis
• The recovery phase
• The new boom
• The politics of unsecured lending
• A new crisis or not?
Early history
• 1992: exemption to the Usury Act was granted
• Intention was to widen access to financial services
• Removed interest rate cap on <R6 000 loans, <36 months
• By 1999 microloan book grown to R15bn, maximum raised to R10 000
• Driven by non-bank lenders
MFRC
• No surprise: abuse was rife
• Exemption framework meant zero regulation
• All lenders had access to Persal – the civil servant payroll – almost risk free
• In 1999 the Microfinance Regulatory Council was established as voluntary self-regulation
• By then the stresses were building
Rate peak
• 1998 E Asia crisis led to a spike in interest rates
• Banks’ default rate took off
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Figure 1: Interest rates and bad debt in South Africa
Prime interest rate Bad debt charge as a % of advances
source: Inet Bridge/Leriba
First crisis
• A small bank crisis unfolded in late 1990s
– Term mismatched balance sheets
– Run on certain small banks
• In 2000 government acted aggressively against microlenders and axed access to Persal
• Saambou, Unifer and African Bank were major lenders amid many small players
• Industry book was R14bn, mostly Persal based
Crisis strikes
• First to be hit was Unifer
• 61% held Absa subsidiary
• By December 2001, insolvent by R1,1bn
• Underprovisioning of R1,8bn
• Had run a “decentralised credit scoring system”
• Absa leaned on to step in and rescue it
Crisis continues
• Combined impact of small banks crisis and Unifer collapse focused attention on Saambou and African Bank
• In February 2002 rumours broke out about Saambou leading to a run on the bank
• Finance minister believed it was solvent, put into curatorship
Crisis continues
• Saambou collapse sparked upward contagion
• BoE (6th largest bank) faced a run
• Unprecedented joint guarantee by Reserve Bank and Finance Ministry
• Left no choice but sale of BoE - Nedbank stepped in
• We stared into the abyss
• African Bank ok, Capitec born
Recovery
• Work began towards a new regulatory regime for unsecured lending
• Much work led by MFRC which drove a voluntary conduct regime
• 2007 saw the launch of NCA and NCR
• Growth of lending took off
NCA features
• Reintroduced an interest rate cap: repo x 2.2 + 20 pc points = 31%
• NCR registration compulsory for books >R500m or 100 clients
• Silent on other charges
• Removed value limits
68.0%
11.2%
9.7%
11.2%
Figure 5: Revenue from unsecured personal loans
Interest rate
Initiation fees
Service fees
Credit life
source: National Credit Regulator
Impact 1
• Rapid growth ensued
5
25
45
65
85
105
125
145
165
185
Figure 2: Unsecured credit gross debtors book (Rbn)
Grand Total 30+ days overduesource: National Credit Regulator
Impact 2
• Loan size grew sharply
0
5
10
15
20
25
Figure 3: Gross book per loan size category (Rbn)
R0K-R3K R3.1K-R5K_U R5.1K-R8K R8.1K-R10K R10.1K-R15K > R15.1K
source: National Credit Regulator
Impact 3
• Loans accelerated in higher-income categories
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2007Q42008Q12008Q22008Q32008Q42009Q12009Q22009Q32009Q42010Q12010Q22010Q32010Q42011Q12011Q22011Q32011Q42012Q12012Q22012Q32012Q4
Figure 4: Gross book per income category (Rbn)
R0-R3500 R3501-R5500 R5501-R7500 R7501-R10K R10.1K-R15K >R15K
source: National Credit Regulator
Why?
• Greater scope under NCR
• Higher affordability levels
• Increasing wage rates among low- and mid- income earners
• Growth of consolidation loans
• “Capture” of clients with large facilities to swamp affordibility
Entry of big 4
• Large banks went into the market
• Higher margins, Basel 3 enhancement
FirstRand Nedbank Standard Bank Absa
Average
margin
(%)
y-o-y
book
growth
(%)
Average
margin
(%)
y-o-y
book
growth
(%)
Average
margin
(%)
y-o-y
book
growth
(%)
Average
margin
(%)
y-o-y
book
growth
(%)
Home loans 1.4 1,9 1.7 -5.5 n/a 4.7 1.9 -2.3
Vehicle finance 4.9 21,5 4.6 10.3 n/a 17 3.9 8.6
Credit cards 8.7 5,5 8.5 16.1 n/a 16 8.8 53.5**
Personal loans 15.5* 93,7 14.1 28.7 n/a 47.9 13.5 2
*FNB Personal loans. WesBank loans have an average margin of 20,75% ** Includes acquisitions of Woolworths and Edcon books
Political backlash
• Systemic fears hark back to 2002 (“our own subprime crisis”)
• Threat of abolishing garnishee orders
• Claim of widespread abuse
• “Caused Marikana”
• Driving labour unrest
• Strangely no comment on the displacement of asset-backed lending
Differences to 2002
• Almost no deposits are exposed to unsecured lending (Capitec – 40% of funding, Abil – 3%)
• Much more widely dispersed
• Small proportion of big bank assets – total unsecured lending of R453bn is less than 13% of bank assets (includes credit cards, overdrafts)
But there is stress
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
Figure 7: Accounts reported as "current"
% Number of accounts % Rand valuesource: National Credit Regulator
Regulations will change
• Garnishee orders, but no abolition
• Standardised affordability testing
• Regulation of debt collectors
• Regulation of insurance products
• Better rate disclosures
• Remodelling of consolidated loans register?
The end Questions?
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