JOHANNESBURG – It is staggering – and deeply concerning – that the body in charge of regulating South Africa’s credit industry refused to provide information to an inquiry into the collapse of one of the country’s largest lenders.
With a loan book of some R60 billion at the time of its demise, African Bank was receiving 60 to 80 complaints of reckless lending a month, mostly from debt counsellors, and was granting between 100 000 and 120 000 loans monthly prior to August 2014, according to the Myburgh Report.
The report, which was led by advocate John Myburgh SC and investigates the circumstances that led to the curatorship of African Bank, finds that the bank’s risk appetite was “higher” than peer banks.
Concluding that the business of the bank was conducted recklessly and negligently – by, for example, failing to provide adequately for bad debts – Myburgh makes no definitive finding on whether the 513 branches of the bank in fact engaged in reckless lending.
“The one body whose duty it is to investigate alleged contravention of the NCA [National Credit Act] is the NCR [National Credit Regulator],” Myburgh notes.
But when the commission sent questions to NCR CEO, Nomsa Motshegare, requesting, among others, details of the bank’s alleged reckless lending activities, Motshegare refused to respond.
“Instead, [Motshegare] wrote a letter to the Registrar in which she expressed the view that the letter not only undermined the NCR’s regulatory authority and decision-making powers but also exceeded the scope of the investigation given to this Commission by the Registrar,” Myburgh notes in his report.
“The NCR did not take the opportunity offered to her of putting her case to the Commission.”
Incredibly, the regulator of African Bank’s lending activities would have nothing to do with an inquiry that sought to get to the bottom of the causes of the bank’s collapse.
It makes no sense. Particularly considering the fact that the NCR came out guns blazing and recommended in 2013 that the bank be slapped with a R300 million fine for reckless lending.
Yet when given the opportunity to answer questions pertaining to the fine, the subsequent R20 million settlement and reckless lending at the bank generally, the NCR refused to be engaged.
When asked by Moneyweb why it declined to respond to Myburgh’s questions, the NCR had no comment.
As a direct result of the NCR’s cold shoulder, the most the Myburgh Report could say was that it was “possible” that the bank had been guilty of reckless lending, given the rapid growth in its loan book and the difficulty in collecting on these loans.
A R75 billion loans target
According to former executive at the bank, Charles Chemel, loans were approved centrally based on information from a customer’s payslip and expense declaration.
There were “five or six queues” – including affordability, fraud and employment confirmation – that a loan application had to pass through, Chemel told the commission.
The whole process took two to three days and loan applications were assessed according to scorecards and rules, which were “designed to prevent reckless lending”, he said.
Branch audits took place once every year or two years.
As long as staff complied with the loan approval policy, the bank would not have had reckless lending, explained another executive, George Rossous. “Staff did not comply if data was captured wrongfully either by overstating income or understating expenditure,” he said.
Certainly, comments made by the South African Reserve Bank (Sarb) in the report suggest possible reckless lending. In its submission to the Commission, the Sarb notes that the bank’s lending criteria were “not appropriate” for the market conditions, listing this as one of 11 primary reasons for the collapse of the bank.
External auditors, Deloitte refer to the bank’s “high risk appetite and aggressive loan book growth” as part of the cause of its distress.
Similarly, the explanation given by former independent non-executive director, Sam Sithole for his resignation from the board in 2013 points to aggressive, if not reckless, lending.
Sithole speaks of a “preoccupation with sales over profitability” manifesting itself in a R75 billion advances target despite an increase in bad debts.
“The drive for the R75 billion target resulted in longer term sizes and larger loans to the same customers, which notched up the risk for the business,” he says.