The South African Reserve Bank (SARB) is predicting a decrease in interest rates as of September, which could bring relief to consumers struggling with financial constraints and reliance on payday loans. The past two years have presented many challenges to South Africans due to the high cost of living, making it difficult for many to afford a basic lifestyle or save for retirement.

Major banks are seeing more bad debts and lower profits due to non-performing loans. As interest rates rise, borrowing costs are also going up leading to higher monthly payments for borrowers. Rising debt and living costs make it harder for borrowers to meet financial commitments, leading to increased credit impairments.

S&P Global Ratings predicts that South Africa’s banking sector is set to face significant challenges, with an estimated R74bn in unpaid loans, representing a 1.4% loss. This figure is nearly double the previous year and highlights the ongoing economic turmoil in the country. Furthermore, all major banks are expected to struggle to recover these unpaid loans leading to a credit loss ratio of 1.18% up from 0.96% in the previous year.

Banks Define Non-performing Loans Differently

What Is A Non-performing Loan (NPL)?

A non-performing loan occurs when a borrower fails to make the agreed-upon payments for a set period, leading to default. The specific duration may vary based on the loan type and industry. A loan is considered non-performing if payments are overdue by 90 days or more.

NPLs are more common during tough economic times and high delinquency rates. These financial institutions may choose to sell these loans at a discount to focus on generating monthly income rather than dealing with the challenges of collecting from delinquent borrowers.

Banks Use Their Financial Statements To Evaluate Loans

Banks label NPLs as bad debts because the chances of recovering the defaulted amounts are slim. Moreover, having these NPLs on the bank’s books negatively impacts cash flow and stock prices. Unpaid interest impacts funds for new loans and expenses.

According to Corporate Finance Institutes, holding a high number of NPLs in relation to a company’s total assets poses significant risks for the bank. Consequently, banks must allocate a portion of their profits as bad debt provisions in case they need to write off these bad debts.

This is a comparison of the credit loss ratios of the different SA banks;

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Interest rate relief might just be what consumers need. This could offer some households breathing space, enabling people to focus on addressing any outstanding payments.

Banks Are Implementing Stricter Lending Requirements

Due to the rising cost of living, banks have tightened their lending criteria for consumers. In 2021, the cost of credit in SA saw a significant increase, with the prime lending rate climbing by 475 basis points to 11.75%. 

Since 2022, major banks have enforced compliance requirements and reduced risk appetite among formal credit providers and banks. This has led some consumers to seek loans from unverified lenders and loan sharks to cover essential expenses like groceries and utilities. It’s important to note that loan sharks charge excessively high interest rates as they operate outside of any regulatory framework.

Will Banks Start Suggesting Debt Counseling To Customers?

Banks understand the significant impact of customers not paying their accounts and loans on time. Banks may suggest debt counselling for those struggling with loan payments due to financial challenges.

By connecting customers with debt counselors, banks aim to recover outstanding debt, reducing their risk. Assisting customers in managing debt helps banks uphold their reputation and customer loyalty, even in challenging times.

Vantage has assisted tens of thousands of clients to overcome debt. We specialize in restructuring debt by reducing monthly payments and interest rates, making it more manageable for our customers. With our consolidation services, you can simplify your payments into one affordable monthly installment for all your debts.