It is beginning to look as if South African banks suspect that the much-talked-of double dip global recession will be a reality in the near future, says Rob Lawrence, National Manager of the bond originators Rawson Finance. Some banks, he adds, are reacting against this possibility (or some other as yet undefined factor) by insisting that those who apply and qualify for a bond, then pass a '˜stress test.
'The stress test looks at what a loan applicant qualifies for and then calculates if his financial position is strong enough to enable him to take the same loan with a 1% or 2% higher interest rate. If the applicant does not '˜pass on the stricter measuring scale, the chances are that his bond will be declined or a lower offer will be made'
At first glance, says Lawrence, this appears to be another responsible, conservative move to reduce the risk of defaulting bond payers. However, on closer examination, it '˜carries no logic.
'If there is to be another global recession (and I would admit that we are close to it) every economist in South Africa will propose that the South African Reserve Bank counter it by dropping the interest rate a further 0,5% or even 1%. That would make it easier for bond applicants to afford their loans. Why, therefore, at this stage put them through a more stringent test which is based on a higher interest rate?'
One possible reason for this, says Lawrence, might be that the banks management now fear that inflation will go to dangerous levels. However, he says, a recession, if it comes, would work against that.
It has been suggested, says Lawrence, that the banks fear that there may be more retrenchments if the economy falters and this will put some bondholders into difficulties. Again, however, he asks, how can the bank know whose job is most at risk and whose is not?
'Obviously state, provincial and municipal employees will be the least vulnerable, but that is about the only conclusion one can come to on this matter'
Echoing the words of both his chairman, Bill Rawson, and his managing director, Tony Clarke, Lawrence says that there is still '˜more than a little mystery surrounding the banks loan policies.
'On the one hand it is said regularly that the banks future lies in lending, in select fields, provided that the National Credit Act criteria are observed. On the other hand, however, policies are put in place which appear to negate that view. The consumer, understandably, becomes very confused and in some cases demoralised under these conditions. Nevertheless, it has to be conceded that there has been a slow but steady growth in home loans, so we can assume that common sense will ultimately prevail in this matter and stress testing will probably be dropped once there is more certainty about the direction the economy is taking'
For further information contact Rob Lawrence on 021 658 7100 or email rob@rawsonfinance.co.za.
