Interest rates are high, but borrowers can take comfort from banks not adding as much of a margin to the Reserve Bank’s repo rate as they were at the peak of the pandemic four years ago.
A study in the Reserve Bank’s latest quarterly bulletin shows that private sector banks improved margins at which they lend to customers over the past three years, narrowing the gap between interest rates they charge and the benchmark repo rate, as they responded to competitive pressures while steering clear of high-risk borrowers.
The study also shows that banks’ deposit rates, which improved relative to the repo during the pandemic, have narrowed back to pre-Covid levels.
And on the lending side, credit card rates have stayed high, at about 10% above the repo rate. The improved margins they offered households post-Covid have been mainly on instalment sales, in which margins stabilised at much lower levels than before Covid-19. Home loans only recently moved closer to prepandemic levels.
High interest rate and worsening bad debt prompted banks to be tougher on credit risk, declining loan applications from many high-risk customers who would normally be charged higher interest rates because of their higher default risk.
The study found the shift towards lower-risk clients was most visible in instalment sale credit and unsecured loans.
Some banks also increased lending volumes through digital channels, with data from those channels allowing for better-informed pricing.
All of this and strong competition in the sector helped reduce lending margins.
Corporate borrowers continue to benefit from lower interest rates, and often lower margins, than those for households.
“The analysis shows that private sector banks applied a definite deposit rate advantage during the Covid-19 lockdown period, which has since reversed after the monetary policy tightening cycle,” the Quarterly Bulletin reported on Thursday.
“Moreover, it seems that stricter lending criteria and risk aversion affect trends in lending rates as changes in monetary policy have not translated into increases of similar magnitude in banks’ lending rates for selected criteria of credit, predominantly due to banks avoiding high credit-risk borrowers.”
The Quarterly Bulletin said the government recorded a primary fiscal surplus for the first time since before the 2008/09 global financial crisis, as the Treasury projected in the February budget.
The national government recorded a primary surplus of R31.6bn in fiscal 2023/24, on a drop in noninterest spending driven by the government’s limited recapitalisation of state-owned enterprises, the bulletin reported. As a ratio of GDP, the primary surplus was 0.4%, lower than the originally budgeted 0.9%.
Net capital outflows on SA’s balance of payments in last year’s fourth quarter swung to net inflows, the bulletin reported, with positive net flows of foreign direct investment and other investment offsetting net portfolio outflows.
The balance of payments recorded a net capital inflow of R51.4bn or 2.9% of GDP in the first quarter, compared with a R10bn net outflow in the fourth quarter. The net inflow on the capital or financial account of SA’s balance of payments more than offset the 1.2% deficit on the current (trade and services) account, benefiting the rand exchange rate during the quarter.
Foreign direct investment inflows benefited from foreign parent companies buying or increasing equity investments in domestic companies, said the bulletin, which mentioned “the acquisition of a domestic publicly listed vehicle tracking company by a foreign company”. But there were continued net portfolio outflows, as foreign investors sold domestic equities in the first quarter and a $1.5bn government foreign bond matured.
The repo rate has stayed at its recent peak of 8.25% since May last year, after rapidly rising inflation prompted the Reserve Bank in November 2021 to implement the first of a series of rate hikes that lifted the repo from its multi-decade low of 3.25% — down from 6.25% on the eve of the Covid-19 pandemic.
The Bank said the long stretch in which the repo remained stable enabled it to get good comparisons of the banks’ deposit and lending rates relative to the repo.
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