The buck that refuses to be passed
Mbongeni Mguni | Friday April 11, 2014 12:41
Approximately seven years ago, minimum wage earners were on an unnatural high. Barclays Bank Botswana, in a bid to corner the raging appetite for loans during the boom years before the recession, lowered its thresholds and offered credit cards to workers earning as little as P750 per month.
At the time, the Bank justified its looser risk policy by arguing that minimum wagers needed to be mainstreamed into the financial sector and many critics appeared won over. Except one leading microlender, perhaps stung by the loss of market share due to Barclays’ under-reaching.
“This will end badly for Barclays and the people borrowing this money,” the microlender told this reporter in 2009.
“The borrowers are being unnecessarily burdened with costly credit card debt and Barclays will not fully recover these funds. It is not even clear if the credit extensions are accompanied by thorough financial education.”
Barclays was not alone in being credit-inclined at the time. The other members of the Big Four, Standard Chartered, First National Bank and Stanbic were all nipping at Barclays’ heels in the scramble for new credit customers.
And why not? The economy was blossoming, registering 5.5 percent growth in 2005, 5.4 percent in 2006 and 4.8 percent in 2007, while inflation for the same period averaged 9.1 percent.
Demand was heating up, consumption was at historic highs and the banks with their credit were at the heart of it all, ensuring that the economy was surfeit with cash. Money was chasing goods!
Bank of Botswana statistics show that during this period, most of the credit was directed not only at the impulsive household sector, but specifically at personal “unsecured” loans which attracted the highest interest rates for banks.
While the cycle could have continued its upswing for a few more years, the global recession intervened in 2009 sending the economy crashing, together with disposable incomes, aggregate demand and critically, borrowers’ ability to repay.
In 2013, the chickens came home to roost at Barclays, when the bank’s impairments jumped 58 percent to P198 million due to debt stress among households, leaving profits 34 percent down at P295.8 million.
Recently, executives somberly explained the genesis of the challenge and how the glistening Promised Land had dissipated into a mirage.
“We went through a retail expansion between 2007 and 2009 and coming out of that we grew our unsecured loan book quite significantly,” explains Barclays finance director, Lipalesa Makepe.
“Following that, we were hit by a high amount of impairments. Any movement in the economy affects unsecured lending because of the impact on people’s disposable incomes.”
Even as Barclays recovered from the impact of the recession on its unsecured loan book, other pressures quickly emerged, extinguishing whatever embers still glowed at the bank for easy household credit.
“The market has recovered, but the bulk of our customers are government and the absence of a significant wage affected them,” Makepe says.
“It was necessary to change to protect the impairment line and to cushion the portfolio against economic changes.”
Part of the change has seen Barclays move towards protecting its impairment line at source – through scheme loans – and also focusing more on its secured lending, such as mortgages and vehicles.
“The bulk of our loan book was personal instalment loans and we saw that the strategy should be to set up a scheme portfolio so that instead of targeting individuals, we target the business,” the finance director said.
Another bank, BancABC has set up a Special Ops unit staffed by ExCo members to crack down on impairments after they rose 137 percent in 2013 across the five countries, including Botswana, it conducts its business.
The bank, which is now the fifth largest in Botswana, exploded onto the market in 2009 with a “loans lead deposits” policy designed to tap into the market overlooked or under-serviced by the Big Four. BancABC quickly built up a reputation as a cash-hungry business as it searched the globe for funds to expand its loan books in Botswana, Zimbabwe and other African states where it was keen to capture market share.
In 2014, stung by arrears, the pan-African group has a range of interventions, including the reduction of exposure to individual borrowers or groups of borrowers as well as tighter credit assessment.
The household indebtedness story is not homogenous across the banking sector though.
Standard Chartered’s impairments dropped 57 percent in 2013, as the bank’s efforts to shift away from heady pre-recession lending, paid off. Two years ago, Stanchart began a rebuilding exercise with tighter credit assessments and more controlled processes.
“Loan impairments are one of our great stories,” says chief financial officer Mpho Masupe.
“We have a well controlled book not from just being cautious, but being careful about monitoring and looking after our loan book.
“We have a strong loan book and we were able to diversify our consumer banking book from 85 percent personal loans to 75 percent by the end of the 2013.”
Similarly, First National Bank Botswana’s impairments dropped by 13 percent in the six months to December 31, 2013, which are the bank’s latest reported results.
Executives all hailed the “conservative approach” with respect to unsecured lending, for the improvements made in lower impairments for the period and the improved quality of the whole loan book.
In between the numbers and as banks shuffle away from the boomerang of the pre-recession easy credit, are the households. While all banks plan to taper new unsecured credit, households still have approximately P14.4 billion of unsecured borrowings to repay, with some components of the loans stretching back to the pre-recession period.
Commercial bank loan arrears among the households stood at P1.23 billion by January with more than 20 percent classified as over 180 days in default.
Observers note that the rapid credit expansion to households prior to the recession was partly facilitated by the absence of statutory obligations on banks to educate borrowers.
Today, the spiralling arrears households suffering from commercial bank loans, are not helped by the lack of credit protection such as statutory debt counselling and mediation.
Various financial planners and personal finance experts have noted that commercial bank arrears are only the tip of an iceberg that also includes informal debt such as metshelo, hire purchase facilities as well as pawnshops and microlender credit.
A credit convention graced by the South African National Credit Regulator last December agreed that a credit watchdog was sorely needed in Botswana, where indebtedness trends mirror those in South Africa. Most of the banks operating in Botswana are also headquartered in South Africa.
The Bank of Botswana (BoB), however, cannot see a crisis in the figures.
While admitting that the Bank does not have comprehensive household indebtedness figures, BoB chiefs are more focused on banking system integrity than the impact at household level. At the Monetary Policy 2014 launch in February, executives inferred that the household debt crisis drifted into the BoB’s purview only in so far as it could potentially impact the integrity of the banking system.
“We don’t have information on the smaller microlenders and the informal sector, but we can confidently say that the amount of lending from there is very small if you look at the overall picture,” said BoB’s director of Monetary and Financial Stability, Kealeboga Masalila.
“It may have an impact at individual level but not at the macro-economic level.
“Indebtedness is something we address through consumer education and protection, we are not at the point of having an Act.”
Monetary and Financial Stability deputy director, Lesedi Senatla added: “At the moment we believe 80 percent of credit is from commercial banks and if you are able to analyse 80 percent you are fine.
“Other lenders are not systemically important.”
Other BoB officials say the economy still has plenty of room to accommodate household credit, which is presently estimated at 20 percent of Gross Domestic Product.
The figures are cold comfort to thousands of over-indebted households who were wooed to the party before the recession, but found themselves left out in the rain at the end of the night.
The BoB’s hands-off attitude stems from its statutory mandate which focuses on monetary policy, advising government, managing reserves and public education. Neither the BoB nor NBFIRA have a specific consumer protection mandate, being regulator bodies for entities within the financial sector.
However, statements by the BoB governor, Linah Mohohlo, could signal some light at the end of the tunnel for households.
“The level of household debt, which is dominated by personal loans, in an environment of slow growth in incomes, is a cause for concern,” she said at the Monetary Policy 2014 launch.
“While current indicators, such as low default ratios, suggest that widespread default risks are not imminent, the related emerging debt repayment burden for households warrants close attention.”
Finally, could someone be listening?