Growth in loans, credit cards poses risk to S.Africa's economy – central bank

JOHANNESBURG, Nov 28 (Reuters) - An acceleration in the growth of riskier, unsecured lending in South Africa threatens the stability of the finance sector, the central bank said on Thursday.

Many poor South Africans rely on unsecured credit – not backed by an asset and generally more expensive to take out – in a stagnant economy, where living costs are rising and unemployment stands at close to 30%.

The South African Reserve Bank (SARB) highlighted a sharp rise in the portion of credit that was unsecured in the second half of 2019 as a risk to financial stability, especially as consumer finances come under growing pressure.

“A highly indebted household sector is a cause for concern, as households are particularly sensitive to shocks in the economy such as sudden increases in prices or interest rates,” the bank said in its biannual review of financial stability.

“Rising debt (especially unsecured debt) in a slowing economy, combined with slowing disposable income growth, raises concerns about the sector’s ability to service its debt.”

Banks, like numerous other industries in South Africa, have struggled in the tough economy, especially when it comes to growing their main consumer lending product – mortgages.

Many have turned to riskier forms of lending such as credit cards and personal loans to boost profits. The SARB said in the second half of the year there had also been a rise in riskier mortgages, where the value of the mortgage exceeds the value of the property.

Banks are also facing higher funding costs as negative sentiment globally is compounded in South Africa by deteriorating public finances and additional government bailouts for ailing state-owned companies, the review continued.

The weak economy was hurting profits at smaller banks in particular, but only six larger lenders were designated by the SARB to be systemically important: Absa, FirstRand , Nedbank, Standard Bank, Capitec and Investec. (Reporting by Emma Rumney; Editing by Andrew Cawthorne)