"Local banks are all expected to follow Standard Bank’s example shortly and lower their lending criteria for households," says Dr Prieur du Plessis, chairman of the Plexus group. "This could considerably lighten households’ heavy financial burden."

Banks’ lending criteria has been raised since mid-2005. The National Credit Act has severely hampered the borrowing capacity of households since July 2007. Furthermore, the South African Reserve Bank increased the repo rate to banks over a two-year period from seven percent to 12 percent in 2008, which resulted in the prime overdraft rate increasing from 10.5 percent to 15.5 percent.

The situation worsened from September 2008 into the second quarter of 2009 due to the global financial crisis following the collapse of Lehman Brothers in the US. "The global liquidity crisis, or lack of liquidity, resulted in major constraints on the balance sheets of local banks, and the cost of capital increased considerably. This also compelled banks to raise their lending criteria," says Du Plessis.

Liquidity abundant once again

However, global liquidity has since returned to normal and liquidity is once again abundant. The Reserve Bank has followed the example of central banks worldwide with sharp cuts in the repo rate. As a result, local banks’ prime overdraft rate has returned to the 10.5 percent level that prevailed in 2006.

According to a recent Ernst & Young survey, the net percentage of local banks applying stricter lending criteria for businesses declined from 87 percent in the first quarter to 72 percent in the second quarter. A further decline to 61 percent is expected in the third quarter.

For households, the net percentage of local banks applying stricter lending criteria dropped a mere one percent — from 86 percent in the first quarter to 85 percent in the second quarter. This figure is expected to be 75 percent for the third quarter.

Cuts had little effect until now

"A lowering of lending criteria is usually closely linked to the Reserve Bank’s repo rate," says Du Plessis. "However, the sharp cuts in the Reserve Bank’s rate have had little effect on banks’ lending criteria until now," says Du Plessis.

"The Reserve Bank formulates monetary policy and the banks execute it. One can thus understand why outgoing Reserve Bank governor Tito Mboweni criticised banks a few months ago for not passing on the benefits of lower lending criteria to consumers," he said.

South African banks raised their lending criteria long before their foreign counterparts, but the opposite is now true. Most US and European banks started lowering their lending criteria in the first quarter of 2009 in line with sharp interest rate cuts. Furthermore, foreign capital is now more cheaply accessible and more readily available to local banks.

Too conservative?

Although local banks will argue that their write-offs and bad debt provisions continue to increase, Du Plessis questions whether banks are not over-providing and being too conservative. The Ernst & Young survey indicates that the net percentage of local banks experiencing higher defaults has dropped from 37 percent in the fourth quarter of 2008 to 27 percent in the second quarter of 2009.

"Defaults by borrowers decrease when interest rates fall and the benefit is passed on to them. Households are currently struggling so much they are inclined rather to incur debt," says Du Plessis. Although recent Reserve Bank statistics reflect that credit card usage continues to decline, loans and advances by commercial banks have increased.

Credit card usage was R742-million lower in the second quarter than the first quarter, and R917-million less than at the end of 2008. Total bank overdrafts at commercial banks also declined by R1.9-billion in the second quarter compared with the previous quarter.

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