South African banks closing the taps – but credit cards are booming

South African banks have sharply reduced the amount of loans they are granting clients as interest rates are expected to be higher for longer. 

The South African Reserve Bank’s data in its first Quarterly Bulletin of 2023 revealed just how quickly banks have closed their lending taps as interest rates rose. 

It noted that the growth in household loans slowed to 4.1% in January 2024 – the lowest rate since March 2021. 

The moderation in extending loans to households was broad-based across all types of credit, particularly within home loans and general loans. 

Year-on-year growth in mortgage advances to households slowed notably from 7.3% in January 2023 to 3.3% in January 2024. 

Likewise, growth in general loans to households moderated from a double-digit growth rate of 11.0% in January 2023 to only 1.2% in January 2024. 

Growth in overdrafts to households also moderated throughout 2023, ending with a contraction of 4.6% in December, followed by moderate growth of 0.9% in January 2024. 

In contrast, growth in credit card advances remains resilient, increasing by 9% in 2023. 

The Reserve Bank attributed this to the growing reliance of households on credit to purchase necessities and support spending. 

The areas where banks are closing their lending taps are shown in the graph below, comparing lending to corporates with lending to households. 

The main driver behind this rise is the country’s stagnant economy, which has resulted in flat disposable income. At the same time, interest rates and inflation have risen sharply. 

Higher interest rates and inflation will hurt local banks by increasing bad debt and making it more difficult for South Africans to repay their loans. 

S&P Ratings expects the banking sector’s credit loss ratio will remain slightly higher than the historical low of 0.75%, averaging 1.4% of total loans through 2024. 

If a credit loss ratio of 1.4% persists throughout the year, South African banks could take a hit of up to R74 billion from unpaid loans. 

Similarly, non-performing loans will likely remain above 4% of systemwide loans in 2024.

These factors will combine to simultaneously subdue the private sector’s appetite for more credit and reduce local banks’ willingness to extend credit. 

Banking CEOs have also made it clear, following their financial results, that they are closing the taps for South Africans by tightening their lending criteria. 

Outgoing FirstRand CEO Alan Pullinger said that while client demand for credit remains elevated, banks are increasingly having to reject these requests. 

“Demand is outstripping supply. Absolutely. You are definitely seeing it in the unsecured lending space, from personal loans to credit cards to overdrafts,” he said. 

However, this increased demand is not met by more supply from banks as consumers cannot afford more debt, and banks are unwilling to take on riskier customers. 

“Demand is very high for these facilities, but approval rates are very low. Maybe around two in ten people are being approved for these products,” Pullinger said. 

He explained that people fail to pass the affordability test for new credit facilities and cannot take on the burden of additional debt in the current environment. 

“There is a lot of unmet demand in that space,” Pullinger said. The declining approval rate of new loans and advances to South Africans is shown in the graph below.