South African banks are facing political pressure to adjust the rate they use as a reference to determine interest charges after measures to contain the coronavirus roiled the economy, according to the nation’s bank regulator.
The so-called prime lending rate is set at 350 basis points above the repurchase rate determined by the South African Reserve Bank’s monetary policy committee. Riskier borrowers would be penalised by being charged higher interest relative to the prime rate. That same spread applies for interest charged under a government-backed loan-guarantee program started by the Banking Association South Africa and National Treasury to help small companies hit by lockdown measures to slow the spread of Covid-19.
“The banks didn’t want to use the term ‘prime rate’ because that has changed once and there’s lots of political pressure to change that spread again,” Kuben Naidoo, a Reserve Bank deputy governor and also head of the Prudential Authority, which regulates lenders, said on a conference call hosted by money manager Ninety One.
The prime rate, and the lending rate for the loan-guarantee program, is currently 7.25%, after the Reserve Bank cut the repurchase rate to 3.75% in May. The spread widened by 50 basis points in September 2001 due to technical changes. A study done by the association and central bank staff in 2009 found that while the prime rate is immaterial to the setting of lending rates it does make it easier for customers to compare and negotiate with banks.
Political pressure is mounting amid slow demand for the R200 billion ($12 billion) loan-guarantee program, which mimics a similar scheme in about 51 countries, Naidoo said. The four biggest lenders — Standard Bank Group, FirstRand, Absa Group and Nedbank Group — have seen take-up of about R2-3 billion each, he said.
“If the crisis is longer and deeper it may be used a bit more,” he said. “We want banks to lend more than they would otherwise lend, but we don’t want them to be reckless and take excessive credit risk.”
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