Nov. 3 (Bloomberg) -- South African banks don’t face a “major systemic threat” from rising bad debts, though the financial position of consumers is fragile, the central bank said.

Bad debts as a proportion of loans rose to 5.53 percent in June from 5.38 percent the month before and 4.19 percent in January, the Reserve Bank said in its Financial Stability Review released in Pretoria today. The value of those bad loans has increased 37.5 percent to 124.9 billion rand since December.

Consumers, which account for 38 percent of bank credit, are under financial strain after the economy fell into its first recession in 17 years, house prices declined and job losses mounted. The Reserve Bank has cut its benchmark interest rate by 5 percentage points to 7 percent since December to ease consumer debt and boost spending.

“With the continuous increase in impaired advances, the quality of banks’ loan books was bound to be affected negatively,” the Reserve Bank said. “Nevertheless, the weakening asset quality of banks is not seen as posing a major systemic threat, as banks have maintained high levels of capital and continued to be profitable.”

FirstRand Ltd., South Africa’s second-biggest financial services company, said on Sept. 15 that bad debts, particularly on mortgages, and investment losses cut profit by 43 percent in the year through June. Bad debt ratios were beginning to ease in the housing and car loan categories, Chief Executive Officer Paul Harris said.

‘Fragile’

Household debt amounted to 76.3 percent of disposable income in the second quarter, little changed from 76.8 percent in the previous three months, the central bank said.

The number of South African consumers who defaulted on debt payments increased 5.2 percent to 7.85 million in the second quarter as rising food prices and mounting job losses slashed incomes, the National Credit Regulator said on Oct. 7.

“The financial position of households also remained relatively fragile,” Reserve Bank Chief Economist Monde Mnyande said in a presentation in Pretoria today. Recent jobs data “confirm the feebleness of households’ financial situation this year.”

The economy shed 484,000 jobs in the third quarter, pushing the unemployment rate to 24.5 percent, the highest of 62 countries tracked by Bloomberg.

Fledgling Recovery

Consumers’ financial position may improve as house prices recover, banks increase lending and after interest rates were lowered, the Reserve Bank said. Interest costs on debt as a proportion of disposable income eased to 9.5 percent in the second quarter from 10.9 percent.

Banks, including Standard Bank Group Ltd. and Nedbank Group Ltd., started to ease lending conditions on mortgages and credit cards in the third quarter as fewer consumers defaulted on debt. That may help to boost credit growth, which slumped to a 43-year low of 1.5 percent in September, according to data from the central bank.

There are “tentative signs” that house prices may begin rising again as homes become more affordable, the Reserve Bank said. House prices fell an annual 4.6 percent in October, compared with 5.2 percent in both August and September, Standard Bank said today.

South Africa’s banking industry is dominated by Standard Bank, FirstRand, Absa Group Ltd. and Nedbank.

To contact the reporter on this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net.

Last Updated: November 3, 2009 06:31 EST