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

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0

5

10

15

20

25

30

Ap

r-9

4

Jan

-95

Oct

-95

Jul-

96

Ap

r-9

7

Jan

-98

Oct

-98

Jul-

99

Ap

r-0

0

Jan

-01

Oct

-01

Jul-

02

Ap

r-0

3

Jan

-04

Oct

-04

Jul-

05

Ap

r-0

6

Jan

-07

Oct

-07

Jul-

08

Ap

r-0

9

Jan

-10

Oct

-10

Jul-

11

Ap

r-1

2

Jan

-13

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

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

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?

www.leriba.com Financial and political risk analysts specialising in Africa