South African banks continue to favour unsecured lending to capitalise on profit and some consumers have been turned down secured loans for higher yielding unsecured loans, says Gary Palmer, CEO of Paragon Lending Solutions.
This has been a cause for concern for key stake holders including the South African Reserve Bank and the National Credit Regulator (NCR). It has led to the NCR to consider amendments to the National Credit Act due to the worrisome explosion of unsecure lending. There is a view that some credit providers are using loopholes in the NCA regulations to entice consumers to take out unsecured lending.
Palmer says that changes to the Act will have an effect on consumers who require unsecured lending, while the current situation has made it difficult for those who require secured lending facilities.
With the ratio of household debt to disposable income hovering near 78%, the NCR is worried about unsecured lending rates, which has been growing 31% year-on-year. “With the global economy still in murky waters and economic growth in developed nations slowing, some financial institutions are not confident that economic difficulties are over yet and have come out cautioning consumers of borrowing more money,” says Palmer.
But according to recent media reports, the NCR indicates that some consumers have been denied secured lending by the big transactional banks and are being offered money through more expensive, unsecured credit instead. Any changes to the Act are only expected in the next financial year.
Palmer says that unsecured lending continues to be the core focus of banks’ lending policies and they are unlikely to shift their business models. “The South African Reserve Bank’s recent interest rate cut by 50 basis points to 5%, which is aimed at stimulating the economy through consumer spending, is unlikely to cause the banks to change their lending strategies.”
According to Palmer the current environment allows consumers and businesses to capitalise on having more disposable income and those in debt benefit from lower interest rates as the cost of paying off a loan is lower. “The banks continue to favour unsecured lending to capitalise on profit and some consumers have been turned down secured loans for higher yielding unsecured loans.”
“Due to these factors, property investors who require asset-backed short-term liquidity for commercial purposes are often subject to lengthy processing and tougher lending criteria and may not be privy to immediate cash flow. This could jeopardise their business interests.”
Because of this, Palmer says that secondary lenders need to play a key role in providing liquidity to the commercial market as they have the ability to lend money to asset-backed customers who need short-term cash flow.
“Secured lenders are able to process applications quicker and provide asset-backed clients with financial solutions and a formal bank guarantee within seven days.”
Palmer says that local property investors should not be deterred from securing finance against their assets as they can continue to grow their businesses despite resistance from commercial banks. “Most reputable second tier lenders will be able to secure funding for commercial developments that may not have been approved by a commercial bank.
“Investors should consider their options and discuss their requirements with an asset-backed specialist if they are struggling to secure finance from the banks,” concludes Palmer.