The CEO of African Bank, Leon Kirkinis, believes that we are already into the beginnings of an adverse credit cycle, the pain of which will be felt by lenders and the wider economy by year-end.
“We are going into a cycle with high risk, we have been in a cycle with high risk, and therefore we are slowing our growth down,” said Kirkinis, speaking in lengthy discussions with Moneyweb at his offices on Monday.
“Typically these cycles tend to be two- to three-year cycles and we think that we are in the second year,” he said.
Lending in SA’s unsecured market has been growing at "unsustainable" rates approaching 40% per annum, resulting in degrees of consumer-indebtedness which have forced a pull-back by most major lenders in the extension of credit.
However, due to a lag in the numbers reflecting consumer indebtedness as reported by credit bureaus, the severity of this indebtedness may only become apparent by the end of 2013.
“Typically what happens to a guy that gets over-indebted is he is going to use money from one loan to pay off another loan or to roll a loan so he looks like he is performing on the bureaus. The excess of credit allows him to roll his multiple obligations and as it starts to slow down his ability to do that starts to become more difficult.
“He suddenly can’t borrow any more from anyone, now he can’t service his debt and expenses and what invariably happens is he is going to go under.
“I reckon you will start to see that in the bureaus towards the latter part of the year.”
For African Bank this will mean a slowdown in its growth in advances to around 23% for the financial year ending 2013, from levels of around 35% in 2012 and just under 40% in 2011.
Kirkinis also expects bad debt expenses to total advances to increase by around 1% from 10.8% last year.
However, as was the case with the Unifer debacle in 2001, there is a chance that lenders which have overextended their loan books may feel a harder knock.
“There are guys that are going to have taken overly optimistic views of the market, it naturally happens, there are always guys who are late in a cycle and catch it at exactly at the wrong time.
But “just how bad it will get is very difficult to say … I don’t think it is a systemic issue anymore, in other words that the whole thing falls over. But I do think the guys who have grown very rapidly into this period are going to see their bad debts kick.
“If previous cycles are anything to go by you are likely to see bad debts jump by 20-25%.”
With lenders expected to see subdued growth for the next few years, the pull-back in credit advances is likely to have a negative effect on the growth of the economy as a whole.
“Retail is being driven by sheer weight of money and credit has definitely had an impact on growth in the sector … as you see the supply side slowdown so you will see the retail sales slowdown,” says Kirkinis.