Gabriel Davel, the new national credit regulator, is optimistic that the credit boom is set to grow even stronger. He says he is confident that lenders are more responsible than they used to be, and that the economy and structural changes in the market are supporting the country’s consumer credit rise.
However, in line with the rising levels of consumer credit uptake, arrears have also started to creep up, but Davel insists that “there is nothing that indicates a crisis”. A new study released by the regulator looked at the growth and composition of credit extended to households in South Africa, and the indications are that there are strong fundamentals underpinning the market.
Cards outstrip other lending
Bank credit extended to households (which accounts for 80 percent to 85 percent of total consumer credit) increased by 135 percent between January 2002 and September 2006, the study found.
Home loans and other asset-backed loans, such as auto finance, comprise 75 percent of the banks’ total ZAR680 billion of lending to households. Much of this is secured lending, driven by rising house prices and disposable incomes, and lower interest rates.
Credit card debt comprises only 5.5 percent of total bank credit to households, but cards have grown at a much faster rate than other consumer credit products such as mortgage lending. By September 2006, South Africa’s banks’ credit card lending almost tripled from ZAR13 billion in January 2002 to ZAR37 billion. Latest figures from the Reserve Bank show credit card debt still growing at over 40 percent a year.
Recent regulatory initiatives, such as the new National Credit Act, due to be implemented in June 2007, has been a factor in rapid credit growth, with lenders trying to get in ahead of the act’s deadline when provisions against reckless lending come into force.
Regulation and responsibility
The new rules will force credit providers to check how indebted potential borrowers are before offering them new debt. The credit regulator has also promised to do regular research on debt and overindebtedness.
However, some in the industry are concerned that low-income earners may be the first to hit repayment troubles if interest rates rise, leading to greater levels of arrears. South Africa’s Reserve Bank governor, Tito Mboweni, recently drew attention to the dangers of high household debt on World Consumer Rights Day, saying: “In the past three years, we have seen household consumption expenditure increasing to extremely high levels. Credit extension by banks has been rising at very high rates, and household indebtedness has also increased to record highs. Some of this can be explained by a number of positive developments in the economy apart from lower interest rates.
“In accepting credit, consumers should understand their rights and not fall prey to aggressive marketing of credit. For this reason we are gratified that the banks have adopted a code of good conduct in the marketing of credit. The National Credit Act, to be implemented in the middle of this year, will provide further protection to consumers. There are, however, always two sides to every transaction and consumers should also act responsibly when taking on further debt.”