Rising credit impairments at South African banks does not pose a major systemic threat to the financialÂ sector, the Central Bank said on Tuesday.
It added that the conditions were likely to improve due to lower interest rates. The South African Reserve Bank said in its latest Financial Stability Review that local banks have been largely shielded against the direct effects of the global financial crisis.
But deteriorating economic conditions and the indirect impact of the crisis had seen bad debts rise by 37.5 per cent to 124.9 billion rand, from December 2008 to June 2009.
â€œNevertheless, the weakening asset quality of banks is not seen as posing a major systemic threat, as banks have maintained high levels of capital and continued to be profitable.Â â€œConditions are likely to improve with a bottoming out of the economic downturn,â€™â€™â€ the central bank said. The bank has cut its repo lending rate by 5 per centage points to 7 per cent since December last year, to help stimulate an economy in its first recession since 1992.
Loans to the private sector have eased sharply due to stricter lending rules introduced in June 2007. Households and companies are curbing their appetite for more debt, after budgets took strain from increases in interest rate between June 2006 and June 2008.
â€œThe slowdown in economic activity and prevailing stricter lending conditions by banks resulted in a further moderation in growth of total loans and advances during the first half of 2009.
â€œCombined with the continuous increase in impaired advances, the quality of banksâ€™ loan books was bound to be affected negatively,â€ the central bank said.
It said while easier monetary policy would have a positive effect on the ability of households to service debt, their financial position had become â€˜relatively fragileâ€ largely due to job losses.
Household debt has, however, remained high at 76.3 per cent of disposable income. The SARB said the corporate sector was also under pressure, with liquidations rising by 33.8 per cent year-on-year in July. It attributed the situation to declining world trade, higher wage demands and weak local demand and high production costs. The central bank, however, noted that it seemed that the banks have begun to ease their lending criteria.