Charlie Graham’s unpacking of the Capitec numbers set a benchmark that’s impressive even in Biznewz’s short history. His was the site’s best story in each of the past two weeks. Such was his excellent analysis and the interest in the subject. So I asked Charlie to pick up on the important news that SA’s biggest institutional investor Old Mutual publicly announced that it will be selling off the Capitec debt instruments that it owns. On the hand the Capitec bulls are painting it as a decision based on an “ethical” review of the micro-lending market. Perhaps there is some truth. But my experience of these things is that ethics are often a secondary excuse for a decision based on a more fundamental assessment. But make up your own mind after reading Charlie’s contribution. – AH
By Charlie Graham*
Old Mutual’s South African fixed-income investment unit announced yesterday its development arm Futuregrowth Asset Management will, as the securities mature over the next three to four years “wind down” its holdings of bonds in Capitec Bank Holdings Ltd, African Bank Investment Holdings Ltd. and other unsecured lenders.
What is critical is the announcement made by Chief Investment Officer Andrew Canter, who helps oversee R128bn ($12.7 billion), who says:
“From having the view that micro-lending was always a social good, now we’re shifting and saying maybe not, maybe there’s damage being done. Nobody says it’s their intention to cripple people, but de facto, that’s what’s happening.”
There are significant social implications for this country.
The poorest of the poor are paying the highest rates in the market, suppressing their ability to raise themselves up and build their own wealth. Capitec charges including loan fees are close to 40% per annum. This is a tax on the poor and vulnerable.
Capitec is of the view that unsecured lending is a social good, stating in its 2013 annual report that the model is a “Policy Triumph” – “a triumph for the Government’s ambition to extend banking to those previously excluded from the banks…… excluding somebody from the credit market because of a lack of security is an attack on the human dignity of that person….this phenomenal growth has been a huge boon to South Africans.”
This is simply not the case. This is purely a capitalist means of feeding on the unfortunate who cannot gain access to regular credit and prevents their social upliftment.
I would argue rather, that an attack on the human dignity of a person occurs when they take an unsecured loan from Capitec, not realising the true costs of this loan which are very expensive. Typically a customer borrows R10 000 and is required to repay at least R30,000 over three years.
Consumers on average are spending close to 70% of their disposable income on servicing their debt.
On page 8 of Abil’s September 2012 results presentation there is a graph showing that loan applicants rejected by Abil had an average debt service cost to income percentage of 70%.
The same graph shows that applicants who were accepted by ABL had an average debt servicing costs to income percentage of 40%. But, and this is important, the 40% calculation is derived before taking the debt service costs of the new loan into account. By the time the costs of the new loans are added in, it is not difficult to imagine that the percentage goes well above 70% leaving very little for everyday living expenses.
The fact that there are people who have a debt service cost to income percentage of 70% applying for credit clearly indicates that there are a lot of desperate South Africans using debt to put food on the table or borrowing from Peter to pay Paul.
There has been widespread fraud and banks have been complicit.
The fraud has occurred on two levels: Affordability Test and Collections
Affordability Test – The national credit act states that a loan can only be made after conducting an affordability test on the customer, in other words, “thou shalt not make a “NINJA” loan” (NINJA = No Income No Job Applicants).
No problem, all that needs to be done is to make a couple of adjustments on the application form overstating income and understating expenses and the loan is magically affordable.
Consider: “In one case, a forklift driver, whose net monthly salary was R2 201, was assessed as having R2 100 to spend on debt, as the shop assistant had entered R99 as his minimum living expenses. Lewis agreed to sell him goods worth R3 109, which worked out to R8 976 over 24 months, or R374 per month.”
Stories like these are frequently in the Press, and more importantly occurring in front of the noses of dozy regulators.
Collection Abuse – The micro lending business model works as follows: Make the loan and then try to collect all the installments. The most efficient way to collect is to establish when a customer gets paid and then run a debit order against his bank account on the same day.
If the debit order fails, then the account is directed to a call centre that starts off with a soft collection strategy which becomes increasingly unpleasant the longer the amount remains outstanding. If the call centre fails to collect the outstanding amount the account is handed over to the external law firms for collection. These lawyers generally go to court to obtain a garnishee order, the garnishee order is an order from the court which instructs the employer of the customer to deduct the amount owing from the employee’s salary.
ENS, a top 3 law firm in South Africa, decided to investigate the mess and found that 59% of garnishees were irregular (Experts estimate that there are 3 million garnishee orders in the system, incredible number considering there are only 11 million people employed in SA).
Clearly some lawyers have had a field day preying on the vulnerable. But now the politicians are threatening to abolish garnishee orders. This would be a great pity for micro lenders, who figured out that there was no need to waste money on their own collections platform when they could just get the employer to do the dirty collections work for them.
African Bank has 1300 people in its call centre. Capitec have less than 200 as it outsources most of their collections to law firms who collect aggressively. The regulator is tired of the abuses of the garnishee orders and is threatening to abolish the system. This would be a serious blow to Capitec’s collection platform
In 2005 Capitec was more of a payday lender making small one month and two month loans targeted at low end customers who could not make it to the next pay day. In 2013, 80% of the loans sold had terms greater than 12 months and 45% greater than 60 months. This is a dramatic shift in their business model. The longer term loans are much larger and result in these large debt servicing costs over a far greater period. Accordingly their disposable incomes are constrained for a longer period.
Conclusion:
George Soros on The Alchemy of Finance:
“The act of lending usually stimulates economic activity, it enables the borrower to consume more than he would otherwise… the same token, debt service has a depressing impact. Resources that would otherwise be devoted to consumption are withdrawn. As the total amount of debt outstanding accumulates, the portion which has to be utilized for debt service increases. It is only net new lending which stimulates, and the total new lending has to keep rising in order to keep net new lending stable”.
The steep growth in unsecured loans is shown below:
December 2009 – R32 billion
December 2012 – R102 billion
These loans are expensive and it is not difficult to imagine that from the R102 billion loans sold in 2012 customers will need to repay over R300 billion over the next three years. That’s R100 billion per annum.
With more and more credit taps being turned off and a jumpy regulator, expect loans sold in 2013 to be significantly below the 2012 level. This means that a large portion of the R100 billion repayments due in 2013 will have to come from consumption or bad debts.
* Charlie Graham is a research analyst at a major money manager. He wants to be able to share his thoughts freely so prefers using a nom de plume.
