SA lenders warned on bad debt

South Africa’s lenders now had reduced firepower to address the deterioration in unsecured loan books, ratings agency Moody’s warned on Monday.

The agency said lenders’ moves to tighten affordability assessments would have a delayed effect in dealing with the challenges faced by the sector.

The warning raises the question of whether unsecured lenders will look to refinance and restructure some of their loans in order to deal with rising bad debts.

Moody’s said that due to the longer periods borrowers were being given to repay their debt, it would take time for tightened affordability assessments to take effect. They had a quicker effect on shorter-term loans, it said.

The ratings agency said that about 62% of new unsecured loans extended in the first quarter matured in more than three years’ time, compared to 29% in the fourth quarter of 2007.

Moody’s also said that the average loan size granted had almost doubled, rising to R17 458 in the first quarter of the year compared to an average of R9 018 in the fourth quarter of 2007.

The ratings agency said typical loans in the market matured at between three and five years.

Moody’s said low-value and short-term loans with repayment periods of a month to a year allowed lenders to address bad debts concerns quickly. "What we are saying is whatever remedial measure is taken today by lenders will take about 12-18 months to improve asset quality.… One of the reasons we expect further asset quality pressures is reduced flexibility by lenders to take remedial measures (to fight rising bad debts)," assistant vice-president Christos Theofilou said.

In a research note published on Monday, Mr Theofilou pointed out that the pressure to deal with rising bad debts would be much more severe with the unsecured lenders than with the larger, major banks in South Africa. This was because major banks held only a smaller portion of unsecured loans compared to their total loan books.

A bigger effect would be felt by those with bigger portfolios of unsecured lenders. However, Mr Theofilou said the larger unsecured lenders, including African Bank, Capitec Bank, Finbond and Real People, could be cushioned by solid underwriting standards, higher margins and capital buffers.

Capital buffers help cushion the impact of higher bad debts.

He said the less-sophisticated lenders, which included newer entrants that were less experienced, could face more challenges.

One of the fears in South Africa’s unsecured lending market is that when the sophisticated lenders tighten affordability assessments, borrowers tend to move on to the next lender with looser criteria. This tends to create more overindebtedness and when the borrower defaults, bad repayments could spread to the established unsecured lenders.

In response to Moody’s research on Monday, Capitec Bank chief financial officer André du Plessis said challenging economic circumstances did have an effect on bad debts for all credit providers, both in the secured and unsecured lending environments. But Mr du Plessis said it was important to note that Capitec Bank dynamically assessed credit-granting criteria to ensure its response "to changing economic circumstances is immediate".

He said the Stellenbosch bank had indicated in its annual financial statements in March that it had tightened its credit criteria last year.

Mr du Plessis said Moody’s had also noted that the "challenging operating conditions in South Africa’s unsecured lending market are counterbalanced by the bank’s strong loss-absorption capacity and comprehensive provisioning policy, and that this is reflected in their reaffirmed stable outlook on the bank".

Moody’s said that while there was an expectation of a further deterioration in loan books, it was not anticipated that this would be big enough to "derail the whole unsecured lending market".

The agency said loan affordability was still supported by moderate inflation rates and an increase in regulatory scrutiny would prevent overly aggressive lending practices.

Source: http://business.iafrica.com

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