Unsecured lending currently accounts for just 8 percent of total credit extended by major banks.
Rapid growth in South Africa’s unsecured lending has not sparked a bubble and banks are managing exposure to the business prudently, the central bank said in its regular review of the financial system on Wednesday.
Growth of unsecured loans – which don’t require collateral and are riskier and more lucrative for banks – has surged over the last year in Africa’s top economy, as lenders push to offset weak corporate demand for credit.
The trend has caused some policy makers and analysts to caution that banks are too eager to extend more credit to debt-laden households.
However, in its Financial Stability Review released on Wednesday, the South African Reserve Bank said unsecured lending accounted for just 8 percent of total credit extended by major banks.
“At these levels unsecured lending does not constitute a bubble,” the central bank said.
“This should also be seen against the background of a banking sector that is managing its exposure to unsecured lending prudently.”
Reserve Bank Deputy Governor Lesetja Kganyago struck a more concerned tone last week, saying that unsecured lending was “growing too fast”.
Unsecured lending exposure among six selected banks grew by 11.3 percent year-on-year as of December 2011, the central bank said.
The central bank also said major lenders had little exposure to debt-troubled Greece, Italy, Ireland, Portugal and Spain.
It reaffirmed its view that banks will face challenges in meeting tougher liquidity demands from the coming Basel III regulations. However, it said weak overall demand for credit should help lenders with the liquidity requirements.
Original article by Money Web here: Unsecured Credit Boom no Bubble