Gary Palmer, chief executive of Paragon Lending Solutions, believes that sluggish economic growth and the current inflation and interest rate environment will only add strain to the already pressured retail consumer.
“If you look at the overall macro view of the economy, it doesn’t bode well for consumers. Their household disposable income has fallen and whatever income they’ve got, they’re going to have to pay more on their debt,” Palmer told CNBCafrica.com.
“People need to tighten their belts now. Banks are not going to open up their channels [and] are going to continue to be conservative, if not more conservative than they have been over the last five years.”
UNCERTAINTY IN THE SECTOR
Following the recent downgrade of South Africa’s four largest banks – [DATA SBK:Standard Bank], [DATA ABSP:Absa Bank], [DATA FSR:FirstRand Bank] and [DATA NBKP:Nedbank] – by ratings agency Moody’s, the industry as a whole has been characterised by uncertainty.
(READ MORE: Moody’s downgrades four S.African banks)
The downgrade was partly attributed to the actions taken by the South African Reserve Bank (SARB) in response to the loss of creditor confidence in [DATA ABL:African Bank Investments] (ABIL).
The SARB introduced several support measures for ABIL including the appointment of a curator for the company and a capital raising by a number of South African banks.
“When you are in the banking sector, it’s all about confidence, so when the market is not confident and they’re saying, ‘Well if that can happen to African Bank, what’s going to happen with everything else’, it causes a ripple effect through the whole economy,” Palmer said.
“Borrowers get nervous, Banks get nervous. It doesn’t bode well for a good economy and a good lending and borrowing environment when banks are being downgraded.”
THE RISE AND FALL OF UNSECURED LENDING
According to Palmer, the unsecured lending space in particular had seen an unprecedented boom shortly before the cracks started showing.
“In about 2009, the banks weren’t lending. They were dealing with the bad debts on their books and you also saw a massive increase in regulations. Then, I would say since 2011, the banks started opening up again but mainly in the area of unsecured lending, and it was unprecedented,” he explained.
“We saw cracks developing probably about a year and a half ago – the banks started tightening up, and then we’ve just had this big explosion with African Bank.”
He also stated that the South African economy has unquestionably been fuelled by unsecured lending over the last five years.
“People wanted to put down a deposit for their house, they would get an unsecured loan. [If] they wanted to shop at furniture stores and retailers, it was all unsecured. The economy was ticking on relatively nicely, mainly as a result of this unsecured lending boom,” Palmer indicated.
“Now that that’s ground to a complete halt, banks are still not lending on property-related transactions as much as they were pre-2009 and it doesn’t bide well for borrowers. Whether it’s in the property space, in business [or] in the unsecured lending space, it’s going to be difficult times for the next while.”
WHAT ARE THE ALTERNATIVES?
The tightening of banking regulations has also led to an increased focus on alternative lending options for consumers.
(READ MORE: Innovation at the heart of S.Africa’s banking space)
“There are three areas that people are going to now – one is asset managers. They are focused on much bigger deals but nonetheless, they are becoming lenders in this economy because they are not governed by the same strict regulations that the banks are,” said Palmer.
“Another space is niche non-bank lenders – we’re a non-bank lender and we’ve definitely seen fantastic transactions that the banks can’t lend into or don’t want to lend into. The third space, [which] hasn’t come to South Africa aggressively yet but will, is what we call peer-to-peer lending or crowdfunding.”