Mboweni slams credit-card binge

By Erika van der Merwe

Imagine the irony of blithely offering a central bank head a credit card, particularly at a time when he and his policy team are losing sleep over credit growth and household indebtedness.

It was an unamused Reserve Bank Governor Tito Mboweni who related the story of being offered a Voyager credit card while waiting for a flight; it seems that, like many other South Africans, he and his staff have been the target of banks’ and other institutions’ credit-card splurges.

Mboweni said that he had met with banking heads recently to discuss this “worrying trend” of the increasing availability of credit cards, and that the institutions appear to see nothing wrong with it.

He warned that if this rise in the availability of credit cards continued, the Reserve Bank may have to toughen up on its reserve requirements – the proportion of deposits that banks are not permitted to lend out.

“If moral suasion does not work, action will be taken,” he said. He refused to elaborate on the nature of the possible policy response.

Michael Power, strategist at Investec Asset Managers, says it seems the governor does not like using interest rates as his only policy tool and that he may well force banks to lift their cash ratios.

Besides, “the consumer cat is out of the bag and it is proving to be very difficult to get it back in”.

But Coronation Fund Managers’ financial sector specialist, Neville Chester, suggests that there is a more direct solution for the Reserve Bank’s concern about credit card extensions: it could increase the interest rate charged on credit cards.

A number of credit-card companies peg their interest rate at the level of the usury rate; this rate has not been adjusted this year, in spite of the 200 basis point worth of rate hikes implemented since June.

The Department of Trade and Industry sets the usury rate, which determines the maximum interest rate that financial services and retail companies can charge for credit. Micro-lenders are exempt from this rate, which will fall away with the implementation in June of the National Credit Act.

“It is no wonder that consumers are spending more,” Chester says; “the [interest rate] signal is simply not getting to consumers, which is part of the reason why we are not seeing a slowdown in consumer spending”.

One can argue that financial institutions are being given mixed signals about how they should be behaving in the lending market. While the Reserve Bank appears to be up in arms about credit growth, banks have signed the Financial Sector Charter, according to which they undertake to extend credit to a broader spectrum of South Africans.

“This is clear, for instance, from Abil’s numbers,” Chester says; “banks are attacking part of this micro-lender’s market by extending credit to lower income groups. ”

“Credit-card debt is a very attractive way to extend banking services to the lower end of the market, since this facility is cheaper than processing a personal loan application,” he says.

Listed banks lost ground on the comment by the Reserve Bank governor, on a day that the rand strengthened.