Loan Rate-Cap Plan in South Africa Criticized, Central Bank Says

  • Low-income earners may be most negatively affected by caps
  • Banking Association of South Africa sees growth in loan sharks

A government proposal to cap interest rates that can be charged on loans has the Banking Association of South Africa concerned that the move may have negative consequences for consumers and lenders, the country’s central bank said.

“Responses to the proposals to date have differed markedly between those supporting greater consumer protection and those involved in the actual provisioning of credit to consumers,” the South African Reserve Bank said Wednesday in a regular industry stability review released in Johannesburg.

Banks could respond to a cap on loan rates by offering an increased amount of shorter-term debt in a bid to preserve their margins. Potential negative effects for consumers could include the higher interest rates that short-term loans carry compared with longer-dated debt, the central bank said. There could be a sharp rise in the number of banks introducing credit life insurance linked to loans, and consumers being forced to seek credit from informal and unregulated providers, it said.

In June, the Department of Trade and Industry and the National Credit Regulator, acting separately from the banking regulator and National Treasury, suggested cutting the maximum interest rate on various forms of credit, proposing reducing the top rate on unsecured loans to 24.78 percent from 32.65 percent to protect indebted consumers. While the South African government wants to increase access for low-incomer earners to finance, unsecured lending may contract by 20 billion rand ($1.5 billion) if the rate caps are introduced, Johannesburg-based research house Avior Capital Markets has estimated.

Should the banking industry’s response to a cap be in line with the association’s concerns, “then it is likely that the lowest income earners will be most affected in that they will bear the brunt of these changes,” the central bank said in its report. It would be prudent to conduct a “detailed macroeconomic impact assessment of the proposed changes,” it said.

With banks’ profit margins on lending already narrowing, and chief executive officers forecasting increasing bad loans because of rising inflation and climbing interest rates, lenders are tightening their credit screening.

“To the extent that the caps put on unsecured lending don’t give banks the required rate of return, given the non-performing loans, it could have the impact of supply into that market drying up,” Johan Burger, CEO of Johannesburg-based FirstRand Ltd., Africa’s biggest bank, said in an interview last month. “We wrote to the department of trade and industry saying that they must look at the unintended consequences.”

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