Big changes to loans on the cards for South Africa

South African Reserve Bank Governor Lesetja Kganyago said he favours ending the use of prime, the main reference rate commercial banks use to price trillions of rand of loans to clients.

“We would like to have much more transparency, so that consumers know what is actually going on,” Kganyago said in an interview Wednesday on Newzroom Afrika from the World Economic Forum in Davos, Switzerland.

The central bank is undertaking a study to review the rate, and “the most natural outcome would be that we just get rid of prime,” he said. 

The central bank confirmed earlier this month that is reviewing the rate that has been fixed at 350 basis points above the country’s monetary policy rate since 2001. 

The central bank’s benchmark rate is currently 6.75%, and the monetary policy committee meets next week to review it. 

Lenders typically price loans using prime as a reference, with premiums or discounts to the measure depending on the cost of funding, risk appetite and the creditworthiness of clients. 

Gross loans and advances extended by banks amounted to R6.2 trillion in October, central bank data shows. 

“The prime rate is a bizarre hangover from history that the Reserve Bank has historically refused to touch, overplaying the costs to banks and others to change contracts, but it seems to have now seen the light,” said Peter Attard Montalto, managing director at advisory firm Krutham.

“It is long overdue to die — even if the positive impact is slight, it’s a free lunch.” 

Potential reforms could include abolishing the reference rate or adjusting the spread between the monetary policy and prime rates.

Any changes will prompt lenders to revise existing financial contracts such as mortgages, overdrafts, vehicle-finance agreements and credit-card facilities, and may affect bank income.