Lenders focusing on the low end thrive on high prime rate
August 20, 2008
By Tom Robbins
Cape Town - While major banks' loan books are feeling the pinch of higher interests rates and the downturn in the economy, unsecured loans by lenders focusing on the market's low end are swelling.
Absa reported in its interims at the beginning of the month that its write-offs for bad debt had increased by 121 percent to R2.1 billion. Standard Bank said the following week that its bad loans as a percentage of credit worsened to 1.27 percent.
However, African Bank Investments, which mostly lends to low-income groups, said this week that it had granted 40 percent more new loans.
This was supported by Neil Grobbelaar, the deputy managing director of Real People, another mass-market lender. Grobbelaar said mass-market lenders were more resilient to the high interest rate cycle as, unlike the big four banks, they charged fixed interest rates.
Yesterday Old Mutual Investment Group South Africa announced that it had bought a 25 percent stake in Real People, a sign of growing institutional interest in these fixed-interest rate lenders.
When rates climbed, mass market lenders extended the life of the loan, said Grobbelaar.
Typically, the big banks charge variable interest rates. Bottom-end bank clients' ability to finance loans is dampened by the high inflation that precedes high rates.
Mass-market lenders charge higher interest rates on unsecured loans than the big banks to compensate for lending to riskier clients.
Grobbelaar said Real People's interest rates varied from "the mid-twenties" for lower risk clients to the maximum allowed under the National Credit Act, 46.4 percent.
Asked if the company had benefited from big banks' recent tightening of lending criteria as their bad debts rose, he said: "We could have benefited as the big four went up-market again".
However, Andrew Vincent, a portfolio manager at RMB Asset Management, said microlenders had yet to be fully tested in a tough consumer economy.
Many economists have taken the view that high inflation levels are close to peaking, leading to a belief that interest rates would not rise further.
But Vincent said these unfavourable factors took time to make their full impact on the consumer.
The big banks were having a tough time with write-offs on credit card debt and this would have some impact on mass market lenders too, he said.
East London-based Real People has 124 branches in South Africa. In financial 2008 it reported an after-tax profit of R119 million.
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