Unsecured lending: SA sitting on another Steinhoff bubble
South Africa is rushing headlong into another major corporate collapse in the near future, according to Glen Jordan, director of IMB Financial Services.
In his view, reckless credit in the unsecured lending sector was at the centre of the major business failures in the former African Bank and Steinhoff. He thinks it is just a matter of time until the next big player’s bubble bursts.
"While unsecured lending bore fantastic results for companies such as Steinhoff and [former] African Bank (Abil) in the short term, it should be plainly apparent that this model is unsustainable and inevitably leads to collapse," warned Jordan.
"One doesn’t have to look too hard in SA to find other companies making almost obscene returns from unsecured lending and it is just a matter of time before they join Steinhoff and [former] African Bank as 'case studies in corporate greed'."
He is basing his argument on data released by the National Credit Regulator (NCR) in December 2017.
"By separating the relatively healthy debt of the so-called wealthy, in areas such as mortgages, from the distressed credit situation in unsecured lending where the poor majority battle, an entirely different and alarming picture emerges," explained Jordan.
According to NCR data, the amount of credit and store card debt in deep arrears - that is payments that have been due for 120 days or more - is rapidly approaching R18bn.
"Considering that gross domestic product (economic growth) remains almost stagnant, while unemployment levels are on the rise, any company that has a major exposure in the unsecured lending sector is in real danger of going the same way as African Bank and Steinhoff," cautioned Jordan.
In his view, the "lessons of the past" are being ignored or "conveniently forgotten in the pursuit of short-term profit for the books".
"As in all things, the law intended to protect consumers is one aspect, but it is really about the implementation thereof. The law creates 'box ticking' as opposed to a fundamental approach," Jordan told Fin24 on Thursday.
"There needs to be an approach of treating a customer fairly. At the moment there are still legal loopholes, and the way some of the rates and fees are structured enable lenders to get around it. We deal with the 'feet on the ground' and I still see consumers not coping."
To him the approach companies have to unsecured lending ends up being like a golden statue, but with feet of clay.
"The fundamental process of [unsecured] lending works 'brilliantly' when they start, because the margins are spectacular. That is why many companies pile into the sector. This approach, however, has a risky bottom and can only hold up for a certain period before it has to give way," he explained.
As for Steinhoff, Jordan said, although its collapse is "euphemistically" attributed to "accounting irregularities", a research report by the Viceroy Group indicates that at least two of these “accounting irregularities” relate to when Steinhoff moved two loss making loan providers to off balance-sheet entities, namely JD consumer finance and Capfin.
"Through a number of creative and complex internal business transactions, Steinhoff was able to hide these losses from its shareholders and business analysts for a while, but the thread of deceit eventually had to start unravelling and today all can see just how naked this emperor really is," said Jordan.
He told Fin24 that, although it is hidden how big a part unsecured lending was in Steinhoff, judging by what the situation turned out to be at African Bank, he would not be surprised if it was a "sizeable chunk".
"Of course [unsecured lending] would not have be the only reason for Steinhoff's collapse, but I think it did play a part. Otherwise, why did they take [these entities] off the balance sheet and hide it?" he asked.
This article first appeared in Fin 24.
For legal assistance with debt problems contact Armand Rinier at email@example.com.
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