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28 May 2013
Concern over Capitec amid debt spiral
Cape Town – The move by Capitec Bank Holdings [JSE:CPI] to grant large unsecured loans over longer periods does not bode well with consumers feeling financially vulnerable as prices skyrocket, experts said.
As debt is spiralling, most banks are tightening the purse strings, but Capitec seems to be moving in the opposite direction.
Capitec, which makes high-interest loans to low-income consumers, lent a staggering R7.8bn to new customers, according to Business Day.
It recorded a 58% jump on the previous year.
The bank’s decision to increase its unsecured loans is a matter of concern, the publication reported on Sunday.
Unsecured loans are not backed by collateral, making them higher risk but very profitable for banks.
Capitec’s extended loan terms were as a result of pressure on its customers while expanding earnings, said head of financials and retail at First Avenue Asset Management, Matthew Warren.
He said that the bank had already grown its “extended loan book” to over a third of new loan sales.
The entire banking sector would be at risk if Capitec pulled back completely, warned Afrifocus Securities research head Johann Scholtz.
He said that no one would be able to borrow money to repay their existing loans.
Capitec chairperson Michiel le Roux said in the report that in the last twelve months Capitec’s earnings increased by 47% to R1.584m.
At end-March, Capitec reported that its diluted headline earnings per share jumped 47% in the year to end-February.
It was helped by a surge in fees and higher income from loans as it continued to add market share in unsecured lending.
In March, DebtBusters spokesperson Ian Wason said that in recent years, unsecured credit has been growing at rates of up to 40%.
“Unfortunately we can see very little evidence of this money being used for anything other than consumption.”
People are spending more than they earn, and this could only end in a debt spiral, with consumers taking out increasingly expensive loans to keep up with existing loan repayments.
“DebtBusters implore credit providers to perform more stringent checks on their clients before they lend, to implement some form of percentage cap on net income to debt repayments,” Wason added.
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