By Ashleigh Brown, journalist, JustMoney
The Debt Counselling Industry portal (DCI) has slammed South Africa’s National Credit Regulator (NCR) for failing to properly investigate African Bank’s reckless lending practices, which left the bank in debt and resulted in it being bailed out by the South African Reserve Bank (SARB) over the weekend.
DCI’s founder, Deborah Solomon, said African Bank’s need to raise R8,5 billion in new capital due to unsecured loans turning bad was not surprising given the fact that one of the bank’s branches was fined R20 million for breaking the reckless lending provision of the National Credit Act (NCA) by the NCR last year.
Solomon added that the reduction of the proposed R300 million fine of African Bank to just R20 million was also not acceptable and amounted to a slap on the wrist.
“Over the past few years, debt counsellors have lodged thousands of complaints, many relating to reckless lending and breaches against the NCA against the country’s major credit providers, including African Bank. These complaints have repeatedly been sent to the Regulator who has chosen to ignore them and the plight of desperate consumers,” said Solomon.
Abil shares tank
On Thursday 7 August, African Bank Investments Limited (Abil) shares plummeted by 80%. This was after the bank’s quarterly update was released on Wednesday 6 August and its CEO, Leon Kirkinis, resigned. The SARB said that Abil’s losses were in large part due to its unique business model.
“Credit losses and the drain on its resources have resulted, among others, from the inability of its furniture chain, Ellerines, to operate profitably. Abil is the only South African bank to operate a furniture chain,” Said SARB.
The SARB went on to state that Abil’s unique business model also left it vulnerable to changes.
“Unlike most other banks in the country, Abil’s unique business model does not include a diverse set of products and income streams, nor does it offer transactional banking. This makes it unusually vulnerable to a changing or challenging business environment.”
Bail out
Abil has been bailed out by the SARB which is set to pay R7 billion for its bad loan book. Along with this, the bank has been split into two, with the Reserve Bank buying the “bad” bank, and the “good” bank getting a R10 billion capital injection.
The capital injection has been underwritten by Standard Bank, Nedbank, Absa, FirstRand, Investec, and the Public Investment Corporation.
This is not the first time that a bank has been bailed out by taxpayers. Since the 2008 financial crisis a number of banks have been bailed out by governments in the United Kingdom and United States, for example: http://www.justmoney.co.za/bank-account/news/African-Bank-shares-plummet.aspx?id=9a547b6b-987a-4138-bce9-33910221e27b.
Business Day Live reported that: “The good bank has a loan book value of R26 billion net of impairments. The Reserve Bank will pay R7 billion for a bad loan book worth R17 billion, net of specific impairments. The intention is to collect on the bad book to reduce the cost to the taxpayer.”
“The decision to get the other banks to effectively provide insurance on another banks capital is also difficult to analyse the long run impact of but is a clever move to avoid a particular other bank having to take the portfolio over and as such is in our view a least worst option. As such a spike up in interbank rates and nervousness in the currency can be expected,” said a statement by global research firm, Nomura.
No specific reason was given by the SARB for the bailout. However, concerns have been raised by commentators that a number of pension funds and unit trusts have exposure to African Bank shares or debt in some way. Letting the bank fail may have had a major negative effect on the economy resulting in investors losing money.
“The shock wave through the rest of the financial system would arguably have been much greater with potential for deposit runs and wider panic in interbank funding markets,” said Peter Attard Montalto, the executive director and emerging markets economist and Nomura. “The potential for that sort of reaction has been stopped now. Quantifying how much of an impact it would have had on GDP is impossible but I think it’s fair to say it would have been meaningful but manageable.”
Debtors in trouble
Solomon reiterated that consumers were the hardest hit in this saga and accused the NCR of being toothless. “Sadly, in the midst of the illegal activity by credit providers, the consumer credit crisis and this bubble that has burst at African Bank, the NCR has remained the silent spectator as millions of consumers are financially ruined and their lives devastated.
“Reckless lending is having a devastating effect on millions of consumers and in the worst heart breaking cases has led to suicides, leaving families destitute and without their bread winners,” she said.
Should I pay my African Bank loans?
This has been a question on many people’s lips. However, a number of experts have warned against consumers defaulting on the troubled banks’ loans.
“African Bank debtors must not see the company’s financial stresses as an opportunity to take a payment break. Consumers must still adhere to their debt obligations and must not think that they are no longer liable for their debt repayments. Any defaults would still be listed on the bureaus and negatively affect your credit record,” said Ian Wason, CEO of DebtBusters.
Shares on the cheap?
Abil shares are selling for 31 cents after their shares plummeted. However, purchasing of Abil shares have been suspended.
On the EasyEquities platform, shares can only be bought telephonically, as there is too much risk involved.
Paul Theron, the CEO of Vestact tweeted on Friday 8 August that people should avoid buying Abil shares entirely. Theron is adamant that the shares are not worthy buying, even though the price is very enticing. When asked why, Theron said: “It’s not clear that equity holders won't be wiped out in a potential restructuring.”